Here's Why Jianshe Industry Group (Yunnan) (SZSE:002265) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jianshe Industry Group (Yunnan)

What Is Jianshe Industry Group (Yunnan)'s Debt?

As you can see below, at the end of September 2024, Jianshe Industry Group (Yunnan) had CN¥476.0m of debt, up from CN¥280.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.77b in cash, leading to a CN¥1.30b net cash position.

How Healthy Is Jianshe Industry Group (Yunnan)'s Balance Sheet?

According to the last reported balance sheet, Jianshe Industry Group (Yunnan) had liabilities of CN¥4.17b due within 12 months, and liabilities of CN¥522.7m due beyond 12 months. On the other hand, it had cash of CN¥1.77b and CN¥2.12b worth of receivables due within a year. So it has liabilities totalling CN¥797.1m more than its cash and near-term receivables, combined.

Of course, Jianshe Industry Group (Yunnan) has a market capitalization of CN¥24.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jianshe Industry Group (Yunnan) also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Jianshe Industry Group (Yunnan) turned things around in the last 12 months, delivering and EBIT of CN¥140m. There's no doubt that we learn most about debt from the balance sheet. But it is Jianshe Industry Group (Yunnan)'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jianshe Industry Group (Yunnan) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Jianshe Industry Group (Yunnan) 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.

Summing Up

We could understand if investors are concerned about Jianshe Industry Group (Yunnan)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥1.30b. So we are not troubled with Jianshe Industry Group (Yunnan)'s debt use. 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. Case in point: We've spotted 2 warning signs for Jianshe Industry Group (Yunnan) you should be aware of, and 1 of them is a bit concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.