The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Jianshe Industry Group (Yunnan)
What Is Jianshe Industry Group (Yunnan)'s Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Jianshe Industry Group (Yunnan) had debt of CN¥280.0m, up from CN¥75.0m in one year. However, it does have CN¥2.57b in cash offsetting this, leading to net cash of CN¥2.29b.
How Strong Is Jianshe Industry Group (Yunnan)'s Balance Sheet?
According to the last reported balance sheet, Jianshe Industry Group (Yunnan) had liabilities of CN¥4.63b due within 12 months, and liabilities of CN¥643.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.57b as well as receivables valued at CN¥1.70b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥999.5m.
Of course, Jianshe Industry Group (Yunnan) has a market capitalization of CN¥12.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jianshe Industry Group (Yunnan) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jianshe Industry Group (Yunnan)'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 Jianshe Industry Group (Yunnan) had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥4.3b. To be frank that doesn't bode well.
So How Risky Is Jianshe Industry Group (Yunnan)?
Although Jianshe Industry Group (Yunnan) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥269m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest 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. For instance, we've identified 2 warning signs for Jianshe Industry Group (Yunnan) that you should be aware of.
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.