Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 JH Educational Technology INC. (HKG:1935) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for JH Educational Technology
What Is JH Educational Technology's Debt?
The image below, which you can click on for greater detail, shows that JH Educational Technology had debt of CN¥109.0m at the end of June 2019, a reduction from CN¥255.1m over a year. But on the other hand it also has CN¥842.7m in cash, leading to a CN¥733.7m net cash position.
How Strong Is JH Educational Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that JH Educational Technology had liabilities of CN¥232.0m due within 12 months and liabilities of CN¥13.4m due beyond that. Offsetting this, it had CN¥842.7m in cash and CN¥2.89m in receivables that were due within 12 months. So it actually has CN¥600.3m more liquid assets than total liabilities.
This excess liquidity suggests that JH Educational Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that JH Educational Technology has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, JH Educational Technology grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if JH Educational Technology 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 company can only pay off debt with cold hard cash, not accounting profits. While JH Educational Technology 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, JH Educational Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While we empathize with investors who find debt concerning, you should keep in mind that JH Educational Technology has net cash of CN¥733.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥158m, being 127% of its EBIT. The bottom line is that we do not find JH Educational Technology's debt levels at all concerning. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of JH Educational Technology's earnings per share history for free.
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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