Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Zhejiang Jingu Company Limited (SZSE:002488) makes use of debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Zhejiang Jingu
How Much Debt Does Zhejiang Jingu Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Zhejiang Jingu had CN¥2.77b of debt, an increase on CN¥2.06b, over one year. However, because it has a cash reserve of CN¥583.9m, its net debt is less, at about CN¥2.18b.
A Look At Zhejiang Jingu's Liabilities
According to the last reported balance sheet, Zhejiang Jingu had liabilities of CN¥1.96b due within 12 months, and liabilities of CN¥1.77b due beyond 12 months. On the other hand, it had cash of CN¥583.9m and CN¥619.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.52b.
While this might seem like a lot, it is not so bad since Zhejiang Jingu has a market capitalization of CN¥6.82b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Jingu 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.
In the last year Zhejiang Jingu wasn't profitable at an EBIT level, but managed to grow its revenue by 7.2%, to CN¥3.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Zhejiang Jingu had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥202m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥379m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Zhejiang Jingu is showing 3 warning signs in our investment analysis , and 2 of those are concerning...
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.
