Does Zhejiang Jingu (SZSE:002488) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Zhejiang Jingu Company Limited (SZSE:002488) does carry debt. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Zhejiang Jingu

What Is Zhejiang Jingu's Net Debt?

As you can see below, at the end of September 2023, Zhejiang Jingu had CN¥2.73b of debt, up from CN¥1.99b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥450.6m, its net debt is less, at about CN¥2.28b.

How Healthy Is Zhejiang Jingu's Balance Sheet?

The latest balance sheet data shows that Zhejiang Jingu had liabilities of CN¥1.87b due within a year, and liabilities of CN¥1.83b falling due after that. On the other hand, it had cash of CN¥450.6m and CN¥650.6m worth of receivables due within a year. So it has liabilities totalling CN¥2.59b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Zhejiang Jingu has a market capitalization of CN¥5.41b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Jingu'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.

Over 12 months, Zhejiang Jingu reported revenue of CN¥3.3b, which is a gain of 5.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Zhejiang Jingu had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥179m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥418m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Zhejiang Jingu (of which 2 can't be ignored!) you should know about.

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.

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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.