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. We note that Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Shanghai Jin Jiang Online Network Service
What Is Shanghai Jin Jiang Online Network Service's Net Debt?
As you can see below, at the end of March 2023, Shanghai Jin Jiang Online Network Service had CN¥89.0m of debt, up from CN¥44.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.78b in cash, so it actually has CN¥1.69b net cash.
A Look At Shanghai Jin Jiang Online Network Service's Liabilities
The latest balance sheet data shows that Shanghai Jin Jiang Online Network Service had liabilities of CN¥596.8m due within a year, and liabilities of CN¥319.6m falling due after that. Offsetting this, it had CN¥1.78b in cash and CN¥206.3m in receivables that were due within 12 months. So it actually has CN¥1.07b more liquid assets than total liabilities.
This surplus suggests that Shanghai Jin Jiang Online Network Service is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shanghai Jin Jiang Online Network Service boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanghai Jin Jiang Online Network Service will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Shanghai Jin Jiang Online Network Service had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥2.0b. We would much prefer see growth.
So How Risky Is Shanghai Jin Jiang Online Network Service?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Shanghai Jin Jiang Online Network Service lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥355m of cash and made a loss of CN¥28m. With only CN¥1.69b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 1 warning sign for Shanghai Jin Jiang Online Network Service that you should be aware of before investing here.
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.
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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.