Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jonjee Hi-Tech Industrial and Commercial Holding Co.,Ltd (SHSE:600872) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jonjee Hi-Tech Industrial and Commercial HoldingLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jonjee Hi-Tech Industrial and Commercial HoldingLtd had CN¥473.6m of debt, an increase on none, over one year. But on the other hand it also has CN¥744.4m in cash, leading to a CN¥270.8m net cash position.

How Healthy Is Jonjee Hi-Tech Industrial and Commercial HoldingLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jonjee Hi-Tech Industrial and Commercial HoldingLtd had liabilities of CN¥1.81b due within 12 months and liabilities of CN¥213.8m due beyond that. On the other hand, it had cash of CN¥744.4m and CN¥73.1m worth of receivables due within a year. So it has liabilities totalling CN¥1.21b more than its cash and near-term receivables, combined.

Of course, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has a market capitalization of CN¥18.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jonjee Hi-Tech Industrial and Commercial HoldingLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Jonjee Hi-Tech Industrial and Commercial HoldingLtd has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jonjee Hi-Tech Industrial and Commercial HoldingLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jonjee Hi-Tech Industrial and Commercial HoldingLtd 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. Over the last three years, Jonjee Hi-Tech Industrial and Commercial HoldingLtd recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jonjee Hi-Tech Industrial and Commercial HoldingLtd has CN¥270.8m in net cash. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in CN¥639m. So is Jonjee Hi-Tech Industrial and Commercial HoldingLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Jonjee Hi-Tech Industrial and Commercial HoldingLtd (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.