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. We can see that Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Shanghai Jin Jiang Online Network Service
What Is Shanghai Jin Jiang Online Network Service's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Shanghai Jin Jiang Online Network Service had CN¥50.1m of debt in September 2023, down from CN¥103.1m, one year before. However, its balance sheet shows it holds CN¥1.67b in cash, so it actually has CN¥1.62b net cash.
How Strong Is Shanghai Jin Jiang Online Network Service's Balance Sheet?
The latest balance sheet data shows that Shanghai Jin Jiang Online Network Service had liabilities of CN¥571.6m due within a year, and liabilities of CN¥362.9m falling due after that. Offsetting this, it had CN¥1.67b in cash and CN¥238.4m in receivables that were due within 12 months. So it actually has CN¥973.3m more liquid assets than total liabilities.
It's good to see that Shanghai Jin Jiang Online Network Service has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shanghai Jin Jiang Online Network Service has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Jin Jiang Online Network Service's earnings that will influence how the balance sheet holds up in the future. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Shanghai Jin Jiang Online Network Service?
Although Shanghai Jin Jiang Online Network Service had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥123m. 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. For example Shanghai Jin Jiang Online Network Service has 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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.
