Is Jangho Group (SHSE:601886) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Jangho Group Co., Ltd. (SHSE:601886) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jangho Group

How Much Debt Does Jangho Group Carry?

As you can see below, Jangho Group had CN¥2.49b of debt at September 2024, down from CN¥2.66b a year prior. But it also has CN¥4.63b in cash to offset that, meaning it has CN¥2.14b net cash.

How Strong Is Jangho Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jangho Group had liabilities of CN¥19.2b due within 12 months and liabilities of CN¥1.09b due beyond that. Offsetting these obligations, it had cash of CN¥4.63b as well as receivables valued at CN¥16.4b due within 12 months. So it actually has CN¥750.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Jangho Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jangho Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Jangho Group grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jangho Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jangho Group 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 two years, Jangho Group produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jangho Group has net cash of CN¥2.14b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.4b, being 68% of its EBIT. So we don't think Jangho Group's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Jangho Group .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.