David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Jiangsu Zongyi Co.,LTD (SHSE:600770) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for Jiangsu ZongyiLTD
What Is Jiangsu ZongyiLTD's Debt?
As you can see below, Jiangsu ZongyiLTD had CN¥318.5m of debt at September 2023, down from CN¥395.7m a year prior. However, its balance sheet shows it holds CN¥1.42b in cash, so it actually has CN¥1.11b net cash.
A Look At Jiangsu ZongyiLTD's Liabilities
According to the last reported balance sheet, Jiangsu ZongyiLTD had liabilities of CN¥497.1m due within 12 months, and liabilities of CN¥323.4m due beyond 12 months. On the other hand, it had cash of CN¥1.42b and CN¥183.4m worth of receivables due within a year. So it actually has CN¥787.8m more liquid assets than total liabilities.
This surplus suggests that Jiangsu ZongyiLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu ZongyiLTD has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu ZongyiLTD will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Jiangsu ZongyiLTD made a loss at the EBIT level, and saw its revenue drop to CN¥345m, which is a fall of 8.2%. That's not what we would hope to see.
So How Risky Is Jiangsu ZongyiLTD?
While Jiangsu ZongyiLTD lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥110m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too 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. Case in point: We've spotted 1 warning sign for Jiangsu ZongyiLTD you should be aware of.
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.