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 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. As with many other companies JC Finance & Tax Interconnect Holdings Ltd. (SZSE:002530) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 JC Finance & Tax Interconnect Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 JC Finance & Tax Interconnect Holdings had CN¥297.4m of debt, an increase on CN¥285.6m, over one year. However, it does have CN¥380.2m in cash offsetting this, leading to net cash of CN¥82.8m.

How Strong Is JC Finance & Tax Interconnect Holdings' Balance Sheet?

We can see from the most recent balance sheet that JC Finance & Tax Interconnect Holdings had liabilities of CN¥968.9m falling due within a year, and liabilities of CN¥118.9m due beyond that. Offsetting these obligations, it had cash of CN¥380.2m as well as receivables valued at CN¥422.1m due within 12 months. So its liabilities total CN¥285.6m more than the combination of its cash and short-term receivables.

Of course, JC Finance & Tax Interconnect Holdings has a market capitalization of CN¥5.78b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, JC Finance & Tax Interconnect Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although JC Finance & Tax Interconnect Holdings made a loss at the EBIT level, last year, it was also good to see that it generated CN¥14m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is JC Finance & Tax Interconnect Holdings's earnings that will influence how the balance sheet holds up in the future. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While JC Finance & Tax Interconnect Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, JC Finance & Tax Interconnect Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about JC Finance & Tax Interconnect Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥82.8m. So we don't have any problem with JC Finance & Tax Interconnect Holdings's use of debt. While JC Finance & Tax Interconnect Holdings didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.