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. Importantly, Jin Tong Ling Technology Group Co., Ltd. (SZSE:300091) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Jin Tong Ling Technology Group
What Is Jin Tong Ling Technology Group's Net Debt?
As you can see below, Jin Tong Ling Technology Group had CN¥1.81b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥306.5m in cash, and so its net debt is CN¥1.51b.
How Strong Is Jin Tong Ling Technology Group's Balance Sheet?
We can see from the most recent balance sheet that Jin Tong Ling Technology Group had liabilities of CN¥3.36b falling due within a year, and liabilities of CN¥486.9m due beyond that. Offsetting these obligations, it had cash of CN¥306.5m as well as receivables valued at CN¥2.33b due within 12 months. So its liabilities total CN¥1.22b more than the combination of its cash and short-term receivables.
Jin Tong Ling Technology Group has a market capitalization of CN¥4.21b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jin Tong Ling Technology Group'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 Jin Tong Ling Technology Group had a loss before interest and tax, and actually shrunk its revenue by 5.9%, to CN¥1.4b. We would much prefer see growth.
Caveat Emptor
Importantly, Jin Tong Ling Technology Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥345m. 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. For example, we would not want to see a repeat of last year's loss of CN¥375m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jin Tong Ling Technology Group is showing 2 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.