Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Jiangsu JieJie Microelectronics Co.,Ltd. (SZSE:300623) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Jiangsu JieJie MicroelectronicsLtd

How Much Debt Does Jiangsu JieJie MicroelectronicsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Jiangsu JieJie MicroelectronicsLtd had CN¥1.44b of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥2.03b in cash, so it actually has CN¥589.1m net cash.

How Healthy 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 can boast 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. Succinctly put, Jiangsu JieJie MicroelectronicsLtd 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 Jiangsu JieJie MicroelectronicsLtd has boosted its EBIT by 45%, 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 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. Jiangsu JieJie MicroelectronicsLtd 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, 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 impressed us with its EBIT growth of 45% over the last year. So we don't have any problem with Jiangsu JieJie MicroelectronicsLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Jiangsu JieJie MicroelectronicsLtd you should be aware of, and 1 of them shouldn't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.