Is Jiajia Food GroupLtd (SZSE:002650) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Jiajia Food Group Co.,Ltd (SZSE:002650) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiajia Food GroupLtd

How Much Debt Does Jiajia Food GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jiajia Food GroupLtd had debt of CN¥180.2m, up from CN¥148.2m in one year. But it also has CN¥233.7m in cash to offset that, meaning it has CN¥53.5m net cash.

How Healthy Is Jiajia Food GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiajia Food GroupLtd had liabilities of CN¥416.0m falling due within a year, and liabilities of CN¥76.8m due beyond that. On the other hand, it had cash of CN¥233.7m and CN¥122.0m worth of receivables due within a year. So its liabilities total CN¥137.1m more than the combination of its cash and short-term receivables.

Of course, Jiajia Food GroupLtd has a market capitalization of CN¥5.55b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jiajia Food GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiajia Food GroupLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Jiajia Food GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥1.3b. To be frank that doesn't bode well.

So How Risky Is Jiajia Food GroupLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Jiajia Food GroupLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥126m and booked a CN¥234m accounting loss. However, it has net cash of CN¥53.5m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 1 warning sign with Jiajia Food GroupLtd , and understanding them should be part of your investment process.

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.