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 Changsha Jingjia Microelectronics Co., Ltd. (SZSE:300474) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

How Much Debt Does Changsha Jingjia Microelectronics Carry?

As you can see below, Changsha Jingjia Microelectronics had CN¥202.3m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.08b in cash offsetting this, leading to net cash of CN¥880.7m.

How Strong Is Changsha Jingjia Microelectronics' Balance Sheet?

According to the last reported balance sheet, Changsha Jingjia Microelectronics had liabilities of CN¥602.2m due within 12 months, and liabilities of CN¥178.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.08b as well as receivables valued at CN¥1.02b due within 12 months. So it actually has CN¥1.32b more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Changsha Jingjia Microelectronics if management cannot prevent a repeat of the 93% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changsha Jingjia Microelectronics 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 Changsha Jingjia Microelectronics 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. During the last three years, Changsha Jingjia Microelectronics burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changsha Jingjia Microelectronics has net cash of CN¥880.7m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Changsha Jingjia Microelectronics's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Changsha Jingjia Microelectronics 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.