Is JINHUI LIQUOR (SHSE:603919) 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. We note that JINHUI LIQUOR Co., Ltd. (SHSE:603919) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for JINHUI LIQUOR

How Much Debt Does JINHUI LIQUOR Carry?

As you can see below, JINHUI LIQUOR had CN¥12.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥958.0m in cash offsetting this, leading to net cash of CN¥946.0m.

How Healthy Is JINHUI LIQUOR's Balance Sheet?

The latest balance sheet data shows that JINHUI LIQUOR had liabilities of CN¥924.7m due within a year, and liabilities of CN¥46.8m falling due after that. On the other hand, it had cash of CN¥958.0m and CN¥148.6m worth of receivables due within a year. So it can boast CN¥135.1m more liquid assets than total liabilities.

This state of affairs indicates that JINHUI LIQUOR's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥8.36b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, JINHUI LIQUOR boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that JINHUI LIQUOR has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JINHUI LIQUOR 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JINHUI LIQUOR has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, JINHUI LIQUOR generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case JINHUI LIQUOR has CN¥946.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥233m, being 88% of its EBIT. So we don't think JINHUI LIQUOR's use of debt is risky. 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. Be aware that JINHUI LIQUOR is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.