Is Shanghai Jiao Yun Group (SHSE:600676) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shanghai Jiao Yun Group Co., Ltd. (SHSE:600676) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shanghai Jiao Yun Group

What Is Shanghai Jiao Yun Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shanghai Jiao Yun Group had CN¥104.0m of debt, an increase on CN¥59.9m, over one year. But it also has CN¥2.66b in cash to offset that, meaning it has CN¥2.55b net cash.

A Look At Shanghai Jiao Yun Group's Liabilities

We can see from the most recent balance sheet that Shanghai Jiao Yun Group had liabilities of CN¥1.28b falling due within a year, and liabilities of CN¥647.1m due beyond that. On the other hand, it had cash of CN¥2.66b and CN¥1.07b worth of receivables due within a year. So it actually has CN¥1.81b more liquid assets than total liabilities.

This excess liquidity is a great indication that Shanghai Jiao Yun Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Shanghai Jiao Yun Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Jiao Yun Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shanghai Jiao Yun Group made a loss at the EBIT level, and saw its revenue drop to CN¥4.9b, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is Shanghai Jiao Yun Group?

Although Shanghai Jiao Yun Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥302m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 2 warning signs we've spotted with Shanghai Jiao Yun Group .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.