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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Jiangsu Dagang Co., Ltd. (SZSE:002077) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Jiangsu Dagang's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Dagang had debt of CN¥597.8m, up from CN¥495.5m in one year. However, it also had CN¥296.7m in cash, and so its net debt is CN¥301.1m.
How Healthy Is Jiangsu Dagang's Balance Sheet?
According to the last reported balance sheet, Jiangsu Dagang had liabilities of CN¥540.3m due within 12 months, and liabilities of CN¥363.5m due beyond 12 months. Offsetting this, it had CN¥296.7m in cash and CN¥107.9m in receivables that were due within 12 months. So its liabilities total CN¥499.1m more than the combination of its cash and short-term receivables.
Since publicly traded Jiangsu Dagang shares are worth a total of CN¥7.92b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Dagang 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 Jiangsu Dagang had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥424m. That makes us nervous, to say the least.
Caveat Emptor
Not only did Jiangsu Dagang's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥36m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥105m and the profit of CN¥27m. So one might argue that there's still a chance it can get things on the right track. 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 Jiangsu Dagang you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.