Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jiangsu Hongdou Industrial Co.,LTD (SHSE:600400) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Jiangsu Hongdou IndustrialLTD
What Is Jiangsu Hongdou IndustrialLTD's Debt?
As you can see below, at the end of June 2023, Jiangsu Hongdou IndustrialLTD had CN¥934.0m of debt, up from CN¥486.5m a year ago. Click the image for more detail. However, it does have CN¥1.18b in cash offsetting this, leading to net cash of CN¥243.4m.
How Strong Is Jiangsu Hongdou IndustrialLTD's Balance Sheet?
According to the last reported balance sheet, Jiangsu Hongdou IndustrialLTD had liabilities of CN¥1.43b due within 12 months, and liabilities of CN¥427.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.18b as well as receivables valued at CN¥685.8m due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Jiangsu Hongdou IndustrialLTD's 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 CN¥7.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jiangsu Hongdou IndustrialLTD boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Hongdou IndustrialLTD's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Jiangsu Hongdou IndustrialLTD made a loss at the EBIT level, and saw its revenue drop to CN¥2.3b, which is a fall of 5.1%. We would much prefer see growth.
So How Risky Is Jiangsu Hongdou IndustrialLTD?
While Jiangsu Hongdou IndustrialLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥10m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Jiangsu Hongdou IndustrialLTD (2 are a bit concerning!) that you should be aware of before investing here.
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.