Is Jihua Group (SHSE:601718) A Risky Investment?

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 Jihua Group Corporation Limited (SHSE:601718) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jihua Group

How Much Debt Does Jihua Group Carry?

As you can see below, Jihua Group had CN¥1.51b of debt at June 2024, down from CN¥2.33b a year prior. However, it does have CN¥4.34b in cash offsetting this, leading to net cash of CN¥2.82b.

How Strong Is Jihua Group's Balance Sheet?

According to the last reported balance sheet, Jihua Group had liabilities of CN¥6.74b due within 12 months, and liabilities of CN¥1.54b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.34b as well as receivables valued at CN¥6.12b due within 12 months. So it can boast CN¥2.18b more liquid assets than total liabilities.

This surplus suggests that Jihua Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Jihua Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jihua Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Jihua Group had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to CN¥11b. We would much prefer see growth.

So How Risky Is Jihua Group?

Although Jihua Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥97m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example Jihua Group has 2 warning signs (and 1 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.