Stock Analysis

Health Check: How Prudently Does Zhejiang Jiaao Enprotech Stock (SHSE:603822) Use Debt?

SHSE:603822
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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.' 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. Importantly, Zhejiang Jiaao Enprotech Stock Co., Ltd (SHSE:603822) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Jiaao Enprotech Stock

How Much Debt Does Zhejiang Jiaao Enprotech Stock Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Jiaao Enprotech Stock had debt of CN¥3.17b, up from CN¥1.69b in one year. However, it also had CN¥280.9m in cash, and so its net debt is CN¥2.89b.

debt-equity-history-analysis
SHSE:603822 Debt to Equity History January 20th 2025

A Look At Zhejiang Jiaao Enprotech Stock's Liabilities

We can see from the most recent balance sheet that Zhejiang Jiaao Enprotech Stock had liabilities of CN¥2.36b falling due within a year, and liabilities of CN¥1.47b due beyond that. Offsetting these obligations, it had cash of CN¥280.9m as well as receivables valued at CN¥160.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.38b.

This is a mountain of leverage relative to its market capitalization of CN¥3.85b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Jiaao Enprotech Stock'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.

In the last year Zhejiang Jiaao Enprotech Stock had a loss before interest and tax, and actually shrunk its revenue by 51%, to CN¥1.5b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Zhejiang Jiaao Enprotech Stock's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥165m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.7b of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Zhejiang Jiaao Enprotech Stock you should be aware of, and 1 of them can't be ignored.

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.

Valuation is complex, but we're here to simplify it.

Discover if Zhejiang Jiaao Enprotech Stock might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.