Does Jiangsu Zhongchao Holding (SZSE:002471) Have A Healthy Balance Sheet?

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.' 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 note that Jiangsu Zhongchao Holding Co., Ltd. (SZSE:002471) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu Zhongchao Holding

What Is Jiangsu Zhongchao Holding's Debt?

The chart below, which you can click on for greater detail, shows that Jiangsu Zhongchao Holding had CN¥1.98b in debt in September 2024; about the same as the year before. On the flip side, it has CN¥811.9m in cash leading to net debt of about CN¥1.16b.

How Healthy Is Jiangsu Zhongchao Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Zhongchao Holding had liabilities of CN¥3.97b due within 12 months and liabilities of CN¥83.2m due beyond that. Offsetting this, it had CN¥811.9m in cash and CN¥2.55b in receivables that were due within 12 months. So its liabilities total CN¥692.3m more than the combination of its cash and short-term receivables.

Since publicly traded Jiangsu Zhongchao Holding shares are worth a total of CN¥4.08b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.77 times and a disturbingly high net debt to EBITDA ratio of 11.3 hit our confidence in Jiangsu Zhongchao Holding like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. One redeeming factor for Jiangsu Zhongchao Holding is that it turned last year's EBIT loss into a gain of CN¥50m, over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Zhongchao Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Jiangsu Zhongchao Holding actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Jiangsu Zhongchao Holding's interest cover was a real negative on this analysis, as was its net debt to EBITDA. But like a ballerina ending on a perfect pirouette, it has not trouble converting EBIT to free cash flow. When we consider all the factors mentioned above, we do feel a bit cautious about Jiangsu Zhongchao Holding's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 2 warning signs for Jiangsu Zhongchao Holding (of which 1 is potentially serious!) 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.