Does Jinzai Food GroupLtd (SZSE:003000) Have A Healthy Balance Sheet?

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 Jinzai Food Group Co.,Ltd. (SZSE:003000) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jinzai Food GroupLtd

What Is Jinzai Food GroupLtd's Net Debt?

As you can see below, at the end of September 2024, Jinzai Food GroupLtd had CN¥250.0m of debt, up from CN¥100.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥491.7m in cash, so it actually has CN¥241.7m net cash.

A Look At Jinzai Food GroupLtd's Liabilities

We can see from the most recent balance sheet that Jinzai Food GroupLtd had liabilities of CN¥585.8m falling due within a year, and liabilities of CN¥30.5m due beyond that. On the other hand, it had cash of CN¥491.7m and CN¥19.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥105.6m.

This state of affairs indicates that Jinzai Food GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥6.42b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jinzai Food GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jinzai Food GroupLtd grew its EBIT by 52% 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 Jinzai Food GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jinzai Food GroupLtd 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. In the last three years, Jinzai Food GroupLtd's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jinzai Food GroupLtd has CN¥241.7m in net cash. And we liked the look of last year's 52% year-on-year EBIT growth. So is Jinzai Food GroupLtd's debt a risk? It doesn't seem so to us. 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 1 warning sign for Jinzai Food GroupLtd that you should be aware of.

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.