Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Jiangsu Phoenix Property Investment Company Limited (SHSE:600716) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Jiangsu Phoenix Property Investment
What Is Jiangsu Phoenix Property Investment's Debt?
The image below, which you can click on for greater detail, shows that Jiangsu Phoenix Property Investment had debt of CN¥543.7m at the end of September 2023, a reduction from CN¥2.08b over a year. However, its balance sheet shows it holds CN¥919.7m in cash, so it actually has CN¥376.0m net cash.
How Healthy Is Jiangsu Phoenix Property Investment's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangsu Phoenix Property Investment had liabilities of CN¥2.23b due within 12 months and liabilities of CN¥690.8m due beyond that. On the other hand, it had cash of CN¥919.7m and CN¥76.0m worth of receivables due within a year. So its liabilities total CN¥1.93b more than the combination of its cash and short-term receivables.
Jiangsu Phoenix Property Investment has a market capitalization of CN¥3.97b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Jiangsu Phoenix Property Investment also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangsu Phoenix Property Investment'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.
Over 12 months, Jiangsu Phoenix Property Investment made a loss at the EBIT level, and saw its revenue drop to CN¥322m, which is a fall of 46%. To be frank that doesn't bode well.
So How Risky Is Jiangsu Phoenix Property Investment?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jiangsu Phoenix Property Investment had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.4b of cash and made a loss of CN¥383m. With only CN¥376.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 - Jiangsu Phoenix Property Investment has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.