Is JINHUI LIQUOR (SHSE:603919) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JINHUI LIQUOR Co., Ltd. (SHSE:603919) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for JINHUI LIQUOR

How Much Debt Does JINHUI LIQUOR Carry?

The image below, which you can click on for greater detail, shows that at September 2024 JINHUI LIQUOR had debt of CN¥23.5m, up from CN¥14.6m in one year. However, its balance sheet shows it holds CN¥771.3m in cash, so it actually has CN¥747.8m net cash.

How Strong Is JINHUI LIQUOR's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JINHUI LIQUOR had liabilities of CN¥1.01b due within 12 months and liabilities of CN¥45.2m due beyond that. On the other hand, it had cash of CN¥771.3m and CN¥186.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥98.3m.

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¥9.68b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, JINHUI LIQUOR also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, JINHUI LIQUOR grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine JINHUI LIQUOR's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JINHUI LIQUOR has CN¥747.8m in net cash. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CN¥294m. So we don't think JINHUI LIQUOR's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of JINHUI LIQUOR's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.