Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jin Tong Ling Technology Group Co., Ltd. (SZSE:300091) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Jin Tong Ling Technology Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Jin Tong Ling Technology Group had CN¥1.81b in debt in September 2023; about the same as the year before. On the flip side, it has CN¥306.5m in cash leading to net debt of about CN¥1.51b.
A Look At Jin Tong Ling Technology Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Jin Tong Ling Technology Group had liabilities of CN¥3.36b due within 12 months and liabilities of CN¥486.9m due beyond that. Offsetting these obligations, it had cash of CN¥306.5m as well as receivables valued at CN¥2.33b due within 12 months. So its liabilities total CN¥1.22b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Jin Tong Ling Technology Group is worth CN¥3.69b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jin Tong Ling Technology Group 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.
Over 12 months, Jin Tong Ling Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 5.9%. We would much prefer see growth.
Caveat Emptor
Importantly, Jin Tong Ling Technology Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥345m. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥375m. So we do think this stock is quite risky. 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 - Jin Tong Ling Technology Group has 3 warning signs we think you should be aware of.
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.
