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. We can see that Shanghai Jinqiao Export Processing Zone Development Co.,Ltd (SHSE:600639) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Shanghai Jinqiao Export Processing Zone DevelopmentLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Shanghai Jinqiao Export Processing Zone DevelopmentLtd had debt of CN¥19.2b, up from CN¥14.0b in one year. On the flip side, it has CN¥5.43b in cash leading to net debt of about CN¥13.8b.
How Healthy Is Shanghai Jinqiao Export Processing Zone DevelopmentLtd's Balance Sheet?
According to the last reported balance sheet, Shanghai Jinqiao Export Processing Zone DevelopmentLtd had liabilities of CN¥14.6b due within 12 months, and liabilities of CN¥12.9b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.43b as well as receivables valued at CN¥234.7m due within 12 months. So it has liabilities totalling CN¥21.8b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥11.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Shanghai Jinqiao Export Processing Zone DevelopmentLtd would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Shanghai Jinqiao Export Processing Zone DevelopmentLtd has a rather high debt to EBITDA ratio of 8.1 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 2.9 times, suggesting it can responsibly service its obligations. Even worse, Shanghai Jinqiao Export Processing Zone DevelopmentLtd saw its EBIT tank 61% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Jinqiao Export Processing Zone DevelopmentLtd 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Shanghai Jinqiao Export Processing Zone DevelopmentLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Our View
On the face of it, Shanghai Jinqiao Export Processing Zone DevelopmentLtd's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its net debt to EBITDA also fails to instill confidence. Considering everything we've mentioned above, it's fair to say that Shanghai Jinqiao Export Processing Zone DevelopmentLtd is carrying heavy debt load. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Shanghai Jinqiao Export Processing Zone DevelopmentLtd you should be aware of, and 2 of them are significant.
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.
