Is Jianshe Industry Group (Yunnan) (SZSE:002265) Using Too Much Debt?

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.' 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. Importantly, Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

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 September 2024 Jianshe Industry Group (Yunnan) had CN¥476.0m of debt, an increase on CN¥280.0m, over one year. 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?

The latest balance sheet data shows that Jianshe Industry Group (Yunnan) had liabilities of CN¥4.17b due within a year, and liabilities of CN¥522.7m falling due after that. 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¥22.3b, 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.

See our latest analysis for Jianshe Industry Group (Yunnan)

Although Jianshe Industry Group (Yunnan) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥140m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jianshe Industry Group (Yunnan)'s earnings that will influence how the balance sheet holds up in the future. 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. During the last year, Jianshe Industry Group (Yunnan) burned a lot of cash. 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¥1.30b in net cash. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Jianshe Industry Group (Yunnan) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.