Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that JHT Design Co.,Ltd. (SHSE:603061) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is JHT DesignLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 JHT DesignLtd had CN¥29.5m of debt, an increase on none, over one year. But it also has CN¥523.4m in cash to offset that, meaning it has CN¥493.9m net cash.

A Look At JHT DesignLtd's Liabilities

We can see from the most recent balance sheet that JHT DesignLtd had liabilities of CN¥215.5m falling due within a year, and liabilities of CN¥4.85m due beyond that. On the other hand, it had cash of CN¥523.4m and CN¥294.1m worth of receivables due within a year. So it can boast CN¥597.1m more liquid assets than total liabilities.

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

It is just as well that JHT DesignLtd's load is not too heavy, because its EBIT was down 40% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if JHT DesignLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JHT DesignLtd 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. Over the last three years, JHT DesignLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case JHT DesignLtd has CN¥493.9m in net cash and a decent-looking balance sheet. So while JHT DesignLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for JHT DesignLtd that you should be aware of before investing here.

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.