Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jinyuan EP Co., Ltd. (SZSE:000546) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Jinyuan EP
What Is Jinyuan EP's Debt?
You can click the graphic below for the historical numbers, but it shows that Jinyuan EP had CN¥1.37b of debt in September 2023, down from CN¥1.51b, one year before. However, because it has a cash reserve of CN¥196.0m, its net debt is less, at about CN¥1.17b.
A Look At Jinyuan EP's Liabilities
The latest balance sheet data shows that Jinyuan EP had liabilities of CN¥1.99b due within a year, and liabilities of CN¥972.8m falling due after that. On the other hand, it had cash of CN¥196.0m and CN¥2.06b worth of receivables due within a year. So it has liabilities totalling CN¥705.6m more than its cash and near-term receivables, combined.
Given Jinyuan EP has a market capitalization of CN¥6.10b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jinyuan EP'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, Jinyuan EP made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 54%. That makes us nervous, to say the least.
Caveat Emptor
While Jinyuan EP's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥486m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥324m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 2 warning signs with Jinyuan EP (at least 1 which is concerning) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.