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.' 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. Importantly, Jiangsu Baoli International Investment Co., Ltd. (SZSE:300135) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.
See our latest analysis for Jiangsu Baoli International Investment
What Is Jiangsu Baoli International Investment's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Baoli International Investment had CN¥1.21b of debt, an increase on CN¥1.03b, over one year. However, it also had CN¥797.6m in cash, and so its net debt is CN¥414.0m.
How Healthy Is Jiangsu Baoli International Investment's Balance Sheet?
The latest balance sheet data shows that Jiangsu Baoli International Investment had liabilities of CN¥1.50b due within a year, and liabilities of CN¥14.4m falling due after that. Offsetting this, it had CN¥797.6m in cash and CN¥557.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥157.7m.
Given Jiangsu Baoli International Investment has a market capitalization of CN¥3.86b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Baoli International Investment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Jiangsu Baoli International Investment wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥2.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Jiangsu Baoli International Investment still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥108m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥104m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For example Jiangsu Baoli International Investment has 3 warning signs (and 2 which are significant) we think you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.