David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, JirFine Intelligent Equipment Co., Ltd. (SZSE:301603) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 JirFine Intelligent Equipment's Net Debt?

As you can see below, JirFine Intelligent Equipment had CN¥11.0m of debt at June 2024, down from CN¥108.6m a year prior. But on the other hand it also has CN¥117.1m in cash, leading to a CN¥106.1m net cash position.

How Strong Is JirFine Intelligent Equipment's Balance Sheet?

We can see from the most recent balance sheet that JirFine Intelligent Equipment had liabilities of CN¥1.07b falling due within a year, and liabilities of CN¥16.3m due beyond that. On the other hand, it had cash of CN¥117.1m and CN¥936.5m worth of receivables due within a year. So it has liabilities totalling CN¥30.1m more than its cash and near-term receivables, combined.

Having regard to JirFine Intelligent Equipment's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.39b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, JirFine Intelligent Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that JirFine Intelligent Equipment has increased its EBIT by 8.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since JirFine Intelligent Equipment 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. JirFine Intelligent Equipment 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. In the last three years, JirFine Intelligent Equipment basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JirFine Intelligent Equipment has CN¥106.1m in net cash. On top of that, it increased its EBIT by 8.7% in the last twelve months. So we don't have any problem with JirFine Intelligent Equipment's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that JirFine Intelligent Equipment is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.