The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Zhejiang Jiecang Linear Motion Technology Co.,Ltd. (SHSE:603583) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Zhejiang Jiecang Linear Motion TechnologyLtd's Debt?

As you can see below, Zhejiang Jiecang Linear Motion TechnologyLtd had CN¥1.07b of debt at September 2024, down from CN¥1.51b a year prior. But it also has CN¥2.38b in cash to offset that, meaning it has CN¥1.31b net cash.

A Look At Zhejiang Jiecang Linear Motion TechnologyLtd's Liabilities

According to the last reported balance sheet, Zhejiang Jiecang Linear Motion TechnologyLtd had liabilities of CN¥2.04b due within 12 months, and liabilities of CN¥187.5m due beyond 12 months. Offsetting this, it had CN¥2.38b in cash and CN¥717.2m in receivables that were due within 12 months. So it actually has CN¥869.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Jiecang Linear Motion TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Jiecang Linear Motion TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Zhejiang Jiecang Linear Motion TechnologyLtd has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. 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 Zhejiang Jiecang Linear Motion TechnologyLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Jiecang Linear Motion TechnologyLtd 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. Looking at the most recent three years, Zhejiang Jiecang Linear Motion TechnologyLtd recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Jiecang Linear Motion TechnologyLtd has CN¥1.31b in net cash and a decent-looking balance sheet. And we liked the look of last year's 77% year-on-year EBIT growth. So we don't think Zhejiang Jiecang Linear Motion TechnologyLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zhejiang Jiecang Linear Motion TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.