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 can see that Shanghai Jiao Yun Group Co., Ltd. (SHSE:600676) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. 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.
View our latest analysis for Shanghai Jiao Yun Group
What Is Shanghai Jiao Yun Group's Net Debt?
The image below, which you can click on for greater detail, shows that Shanghai Jiao Yun Group had debt of CN¥59.9m at the end of June 2023, a reduction from CN¥70.1m over a year. But on the other hand it also has CN¥1.86b in cash, leading to a CN¥1.80b net cash position.
How Healthy Is Shanghai Jiao Yun Group's Balance Sheet?
The latest balance sheet data shows that Shanghai Jiao Yun Group had liabilities of CN¥1.48b due within a year, and liabilities of CN¥692.6m falling due after that. On the other hand, it had cash of CN¥1.86b and CN¥1.87b worth of receivables due within a year. So it actually has CN¥1.57b more liquid assets than total liabilities.
This surplus strongly suggests that Shanghai Jiao Yun Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Shanghai Jiao Yun Group 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 Jiao Yun Group 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.
Over 12 months, Shanghai Jiao Yun Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Shanghai Jiao Yun Group?
While Shanghai Jiao Yun Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥171m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shanghai Jiao Yun Group (of which 1 is potentially serious!) you should know about.
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.
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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.