Warren Buffett famously said, '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 note that Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Jianshe Industry Group (Yunnan)
What Is Jianshe Industry Group (Yunnan)'s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jianshe Industry Group (Yunnan) had CN¥280.0m of debt, an increase on CN¥75.0m, over one year. But on the other hand it also has CN¥2.73b in cash, leading to a CN¥2.45b net cash position.
A Look At Jianshe Industry Group (Yunnan)'s Liabilities
Zooming in on the latest balance sheet data, we can see that Jianshe Industry Group (Yunnan) had liabilities of CN¥4.84b due within 12 months and liabilities of CN¥638.4m due beyond that. Offsetting this, it had CN¥2.73b in cash and CN¥1.59b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.17b more than its cash and near-term receivables, combined.
Of course, Jianshe Industry Group (Yunnan) has a market capitalization of CN¥9.59b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jianshe Industry Group (Yunnan) 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.
In the last year Jianshe Industry Group (Yunnan) had a loss before interest and tax, and actually shrunk its revenue by 37%, to CN¥4.4b. That makes us nervous, to say the least.
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¥206m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with Jianshe Industry Group (Yunnan) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
