Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Jangho Group Co., Ltd. (SHSE:601886) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jangho Group's Net Debt?

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 Healthy 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. On the other hand, it had cash of CN¥3.60b and CN¥16.7b worth of receivables due within a year. So it can boast CN¥991.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Jangho Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jangho Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Jangho Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.1b in EBIT over the last twelve months. 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. That limp level of cash conversion undermines its ability to manage and pay down 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 don't have any problem with Jangho Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jangho Group you should know about.

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.