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.' 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 Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jianshe Industry Group (Yunnan)

How Much Debt Does Jianshe Industry Group (Yunnan) Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jianshe Industry Group (Yunnan) had CN¥376.0m of debt, an increase on CN¥280.0m, over one year. However, it does have CN¥1.94b in cash offsetting this, leading to net cash of CN¥1.57b.

A Look At Jianshe Industry Group (Yunnan)'s Liabilities

The latest balance sheet data shows that Jianshe Industry Group (Yunnan) had liabilities of CN¥4.03b due within a year, and liabilities of CN¥564.0m falling due after that. Offsetting these obligations, it had cash of CN¥1.94b as well as receivables valued at CN¥2.20b due within 12 months. So its liabilities total CN¥455.6m more than the combination of its cash and short-term receivables.

Since publicly traded Jianshe Industry Group (Yunnan) shares are worth a total of CN¥9.57b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jianshe Industry Group (Yunnan) boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Jianshe Industry Group (Yunnan) grew its EBIT by 775% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jianshe Industry Group (Yunnan) 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jianshe Industry Group (Yunnan) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Jianshe Industry Group (Yunnan) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jianshe Industry Group (Yunnan) has CN¥1.57b in net cash. And it impressed us with its EBIT growth of 775% over the last year. So we don't have any problem with Jianshe Industry Group (Yunnan)'s use of debt. 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. For example - Jianshe Industry Group (Yunnan) has 1 warning sign we think you should be aware of.

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.