Is Xinjiang Joinworld (SHSE:600888) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Xinjiang Joinworld Co., Ltd. (SHSE:600888) makes use of debt. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Xinjiang Joinworld

How Much Debt Does Xinjiang Joinworld Carry?

As you can see below, Xinjiang Joinworld had CN¥2.93b of debt at June 2024, down from CN¥3.24b a year prior. But on the other hand it also has CN¥3.18b in cash, leading to a CN¥258.6m net cash position.

A Look At Xinjiang Joinworld's Liabilities

Zooming in on the latest balance sheet data, we can see that Xinjiang Joinworld had liabilities of CN¥3.85b due within 12 months and liabilities of CN¥2.76b due beyond that. Offsetting this, it had CN¥3.18b in cash and CN¥2.13b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.30b more than its cash and near-term receivables, combined.

Of course, Xinjiang Joinworld has a market capitalization of CN¥10.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Xinjiang Joinworld also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Xinjiang Joinworld if management cannot prevent a repeat of the 37% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Xinjiang Joinworld's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Xinjiang Joinworld 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. During the last three years, Xinjiang Joinworld generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Xinjiang Joinworld's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥258.6m. And it impressed us with free cash flow of CN¥225m, being 85% of its EBIT. So we are not troubled with Xinjiang Joinworld's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Xinjiang Joinworld you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.