Jihua Group (SHSE:601718) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Jihua Group Corporation Limited (SHSE:601718) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Jihua Group

How Much Debt Does Jihua Group Carry?

As you can see below, Jihua Group had CN¥1.53b of debt at September 2024, down from CN¥2.26b a year prior. However, it does have CN¥4.71b in cash offsetting this, leading to net cash of CN¥3.18b.

A Look At Jihua Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Jihua Group had liabilities of CN¥7.14b due within 12 months and liabilities of CN¥1.54b due beyond that. On the other hand, it had cash of CN¥4.71b and CN¥5.51b worth of receivables due within a year. So it can boast CN¥1.55b more liquid assets than total liabilities.

This short term liquidity is a sign that Jihua Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 ultimately the future profitability of the business will decide if Jihua Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Jihua Group made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 2.4%. We would much prefer see growth.

So How Risky Is Jihua Group?

While Jihua Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥29m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Jihua Group (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.