Is Jiangsu Hongdou IndustrialLTD (SHSE:600400) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Jiangsu Hongdou Industrial Co.,LTD (SHSE:600400) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiangsu Hongdou IndustrialLTD Carry?

As you can see below, Jiangsu Hongdou IndustrialLTD had CN¥754.5m of debt at September 2024, down from CN¥1.17b a year prior. But on the other hand it also has CN¥1.10b in cash, leading to a CN¥345.6m net cash position.

A Look At Jiangsu Hongdou IndustrialLTD's Liabilities

According to the last reported balance sheet, Jiangsu Hongdou IndustrialLTD had liabilities of CN¥1.45b due within 12 months, and liabilities of CN¥286.2m due beyond 12 months. On the other hand, it had cash of CN¥1.10b and CN¥826.5m worth of receivables due within a year. So it can boast CN¥195.2m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Hongdou IndustrialLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Hongdou IndustrialLTD 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 you can't view debt in total isolation; since Jiangsu Hongdou IndustrialLTD 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.

See our latest analysis for Jiangsu Hongdou IndustrialLTD

In the last year Jiangsu Hongdou IndustrialLTD's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Jiangsu Hongdou IndustrialLTD?

While Jiangsu Hongdou IndustrialLTD lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥46m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu Hongdou IndustrialLTD is showing 2 warning signs in our investment analysis , 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.