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 can see that COFCO Joycome Foods Limited (HKG:1610) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does COFCO Joycome Foods Carry?
As you can see below, at the end of June 2024, COFCO Joycome Foods had CN¥5.34b of debt, up from CN¥4.73b a year ago. Click the image for more detail. However, it also had CN¥506.9m in cash, and so its net debt is CN¥4.83b.
How Healthy Is COFCO Joycome Foods' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that COFCO Joycome Foods had liabilities of CN¥6.01b due within 12 months and liabilities of CN¥1.53b due beyond that. On the other hand, it had cash of CN¥506.9m and CN¥884.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.16b.
When you consider that this deficiency exceeds the company's CN¥5.46b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine COFCO Joycome Foods's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year COFCO Joycome Foods had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥10b. That makes us nervous, to say the least.
Caveat Emptor
Not only did COFCO Joycome Foods's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.4b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of CN¥585m and free cash flow of CN¥1.1b. So one might argue that there's still a chance it can get things on the right track. 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. Be aware that COFCO Joycome Foods is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...
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.
