Is Jiangsu Hongdou IndustrialLTD (SHSE:600400) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Jiangsu Hongdou IndustrialLTD

How Much Debt Does Jiangsu Hongdou IndustrialLTD Carry?

As you can see below, at the end of June 2024, Jiangsu Hongdou IndustrialLTD had CN¥983.4m of debt, up from CN¥934.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.14b in cash, so it actually has CN¥157.0m net cash.

How Strong Is Jiangsu Hongdou IndustrialLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Hongdou IndustrialLTD had liabilities of CN¥1.34b due within 12 months and liabilities of CN¥570.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.14b as well as receivables valued at CN¥658.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥112.0m.

Having regard to Jiangsu Hongdou IndustrialLTD's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.71b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, 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 ultimately the future profitability of the business will decide if Jiangsu Hongdou IndustrialLTD 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.

In the last year Jiangsu Hongdou IndustrialLTD's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Jiangsu Hongdou IndustrialLTD?

Although Jiangsu Hongdou IndustrialLTD had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥27m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jiangsu Hongdou IndustrialLTD that you should be aware of.

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.