We Think Jinzai Food GroupLtd (SZSE:003000) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Jinzai Food Group Co.,Ltd. (SZSE:003000) 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. 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. 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.

View our latest analysis for Jinzai Food GroupLtd

How Much Debt Does Jinzai Food GroupLtd Carry?

As you can see below, at the end of March 2024, Jinzai Food GroupLtd had CN¥70.0m of debt, up from CN¥50.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥556.7m in cash, leading to a CN¥486.7m net cash position.

A Look At Jinzai Food GroupLtd's Liabilities

According to the last reported balance sheet, Jinzai Food GroupLtd had liabilities of CN¥360.3m due within 12 months, and liabilities of CN¥32.5m due beyond 12 months. Offsetting this, it had CN¥556.7m in cash and CN¥10.2m in receivables that were due within 12 months. So it actually has CN¥174.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Jinzai Food GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jinzai Food GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Jinzai Food GroupLtd has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jinzai Food GroupLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jinzai Food GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Jinzai Food GroupLtd's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jinzai Food GroupLtd has net cash of CN¥486.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think Jinzai Food GroupLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jinzai Food GroupLtd (of which 1 can't be ignored!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com