Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jiangsu Rijiu Optoelectronics Jointstock Co., Ltd (SZSE:003015) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Rijiu Optoelectronics's Debt?

As you can see below, Jiangsu Rijiu Optoelectronics had CN¥85.6m of debt at June 2024, down from CN¥121.7m a year prior. But on the other hand it also has CN¥137.8m in cash, leading to a CN¥52.2m net cash position.

How Strong Is Jiangsu Rijiu Optoelectronics' Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Rijiu Optoelectronics had liabilities of CN¥184.9m falling due within a year, and liabilities of CN¥16.9m due beyond that. Offsetting this, it had CN¥137.8m in cash and CN¥164.6m in receivables that were due within 12 months. So it actually has CN¥100.6m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Rijiu Optoelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Rijiu Optoelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Jiangsu Rijiu Optoelectronics grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Rijiu Optoelectronics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jiangsu Rijiu Optoelectronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Jiangsu Rijiu Optoelectronics generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Rijiu Optoelectronics has net cash of CN¥52.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in CN¥123m. So we don't think Jiangsu Rijiu Optoelectronics's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Jiangsu Rijiu Optoelectronics you should be aware of, and 2 of them don't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.