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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jangho Group Co., Ltd. (SHSE:601886) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jangho Group

How Much Debt Does Jangho Group Carry?

As you can see below, at the end of September 2023, Jangho Group had CN¥2.66b of debt, up from CN¥2.48b a year ago. Click the image for more detail. But on the other hand it also has CN¥3.60b in cash, leading to a CN¥938.2m net cash position.

How Strong Is Jangho Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jangho Group had liabilities of CN¥18.0b due within 12 months and liabilities of CN¥1.32b due beyond that. Offsetting these obligations, it had cash of CN¥3.60b as well as receivables valued at CN¥16.7b due within 12 months. So it actually has CN¥991.2m more liquid assets than total liabilities.

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

It was also good to see that despite losing money on the EBIT line last year, Jangho Group turned things around in the last 12 months, delivering and EBIT of CN¥1.1b. 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 Jangho Group can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jangho Group 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. In the last year, Jangho Group created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jangho Group has net cash of CN¥938.2m, as well as more liquid assets than liabilities. So we are not troubled with Jangho Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Jangho Group you should be aware of.

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.