Warren Buffett famously said, '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 Johnson Electric Holdings Limited (HKG:179) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Johnson Electric Holdings Carry?
The chart below, which you can click on for greater detail, shows that Johnson Electric Holdings had US$356.5m in debt in September 2024; about the same as the year before. But it also has US$699.2m in cash to offset that, meaning it has US$342.7m net cash.
A Look At Johnson Electric Holdings' Liabilities
We can see from the most recent balance sheet that Johnson Electric Holdings had liabilities of US$853.3m falling due within a year, and liabilities of US$560.7m due beyond that. On the other hand, it had cash of US$699.2m and US$679.6m worth of receivables due within a year. So it has liabilities totalling US$35.3m more than its cash and near-term receivables, combined.
This state of affairs indicates that Johnson Electric Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.04b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Johnson Electric Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
View our latest analysis for Johnson Electric Holdings
While Johnson Electric Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Johnson Electric Holdings's ability to maintain a healthy balance sheet going forward. 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 Johnson Electric Holdings 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, Johnson Electric Holdings generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
We could understand if investors are concerned about Johnson Electric Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$342.7m. And it impressed us with free cash flow of US$319m, being 96% of its EBIT. So is Johnson Electric Holdings's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Johnson Electric Holdings (including 1 which is a bit unpleasant) .
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.