These 4 Measures Indicate That Zhejiang Jinggong Integration Technology (SZSE:002006) Is Using Debt Reasonably Well
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.' 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. We can see that Zhejiang Jinggong Integration Technology Co., Ltd. (SZSE:002006) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Zhejiang Jinggong Integration Technology
How Much Debt Does Zhejiang Jinggong Integration Technology Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Jinggong Integration Technology had CN¥408.0m of debt, an increase on CN¥40.1m, over one year. But it also has CN¥554.7m in cash to offset that, meaning it has CN¥146.7m net cash.
How Strong Is Zhejiang Jinggong Integration Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zhejiang Jinggong Integration Technology had liabilities of CN¥1.55b due within 12 months and liabilities of CN¥37.6m due beyond that. On the other hand, it had cash of CN¥554.7m and CN¥918.6m worth of receivables due within a year. So it has liabilities totalling CN¥109.5m more than its cash and near-term receivables, combined.
This state of affairs indicates that Zhejiang Jinggong Integration Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.06b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Zhejiang Jinggong Integration Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Zhejiang Jinggong Integration Technology if management cannot prevent a repeat of the 73% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhejiang Jinggong Integration Technology'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Jinggong Integration Technology 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. In the last three years, Zhejiang Jinggong Integration Technology's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Zhejiang Jinggong Integration Technology has CN¥146.7m in net cash. So we are not troubled with Zhejiang Jinggong Integration Technology's debt use. 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. Case in point: We've spotted 4 warning signs for Zhejiang Jinggong Integration Technology you should be aware of, and 1 of them makes us a bit uncomfortable.
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.
Valuation is complex, but we're here to simplify it.
Discover if Zhejiang Jinggong Integration Technology might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About SZSE:002006
Zhejiang Jinggong Integration Technology
Zhejiang Jinggong Integration Technology Co., Ltd.
Adequate balance sheet slight.
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