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We Think Jiangxi Ganyue ExpresswayLTD (SHSE:600269) Is Taking Some Risk With Its Debt

Simply Wall St ·  Sep 25, 2024 15:40

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.' 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. We can see that Jiangxi Ganyue Expressway CO.,LTD. (SHSE:600269) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

How Much Debt Does Jiangxi Ganyue ExpresswayLTD Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangxi Ganyue ExpresswayLTD had CN¥11.9b of debt, an increase on CN¥11.4b, over one year. On the flip side, it has CN¥3.79b in cash leading to net debt of about CN¥8.14b.

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SHSE:600269 Debt to Equity History September 25th 2024

How Strong Is Jiangxi Ganyue ExpresswayLTD's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Ganyue ExpresswayLTD had liabilities of CN¥9.12b falling due within a year, and liabilities of CN¥6.62b due beyond that. On the other hand, it had cash of CN¥3.79b and CN¥1.32b worth of receivables due within a year. So it has liabilities totalling CN¥10.6b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥10.3b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt to EBITDA of 2.8 Jiangxi Ganyue ExpresswayLTD has a fairly noticeable amount of debt. On the plus side, its EBIT was 7.4 times its interest expense, and its net debt to EBITDA, was quite high, at 2.8. One way Jiangxi Ganyue ExpresswayLTD could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 10%, as it did over the last year. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangxi Ganyue ExpresswayLTD'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Jiangxi Ganyue ExpresswayLTD recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Jiangxi Ganyue ExpresswayLTD's struggle to handle its total liabilities had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. But on the bright side, its ability to to convert EBIT to free cash flow isn't too shabby at all. It's also worth noting that Jiangxi Ganyue ExpresswayLTD is in the Infrastructure industry, which is often considered to be quite defensive. We think that Jiangxi Ganyue ExpresswayLTD's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Jiangxi Ganyue ExpresswayLTD has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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