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. We note that Jiangsu JieJie Microelectronics Co.,Ltd. (SZSE:300623) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu JieJie MicroelectronicsLtd

What Is Jiangsu JieJie MicroelectronicsLtd's Debt?

As you can see below, at the end of March 2022, Jiangsu JieJie MicroelectronicsLtd had CN¥1.44b of debt, up from CN¥865.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.03b in cash, leading to a CN¥589.1m net cash position.

How Strong Is Jiangsu JieJie MicroelectronicsLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu JieJie MicroelectronicsLtd had liabilities of CN¥648.2m falling due within a year, and liabilities of CN¥1.47b due beyond that. Offsetting these obligations, it had cash of CN¥2.03b as well as receivables valued at CN¥524.3m due within 12 months. So it actually has CN¥434.8m more liquid assets than total liabilities.

This surplus suggests that Jiangsu JieJie MicroelectronicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu JieJie MicroelectronicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Jiangsu JieJie MicroelectronicsLtd has increased its EBIT by 7.2% 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 Jiangsu JieJie MicroelectronicsLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu JieJie MicroelectronicsLtd 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, Jiangsu JieJie MicroelectronicsLtd 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 we empathize with investors who find debt concerning, you should keep in mind that Jiangsu JieJie MicroelectronicsLtd has net cash of CN¥589.1m, as well as more liquid assets than liabilities. And it also grew its EBIT by 7.2% over the last year. So we are not troubled with Jiangsu JieJie MicroelectronicsLtd's debt use. 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 2 warning signs for Jiangsu JieJie MicroelectronicsLtd (1 is potentially serious!) 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.