Jiangxi Guotai GroupLtd (SHSE:603977) Seems To Use Debt Quite Sensibly

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. Importantly, Jiangxi Guotai Group Co.,Ltd. (SHSE:603977) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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 Jiangxi Guotai GroupLtd

What Is Jiangxi Guotai GroupLtd's Net Debt?

As you can see below, at the end of June 2024, Jiangxi Guotai GroupLtd had CN¥1.15b of debt, up from CN¥789.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.32b in cash, so it actually has CN¥168.5m net cash.

How Healthy Is Jiangxi Guotai GroupLtd's Balance Sheet?

The latest balance sheet data shows that Jiangxi Guotai GroupLtd had liabilities of CN¥1.67b due within a year, and liabilities of CN¥178.5m falling due after that. On the other hand, it had cash of CN¥1.32b and CN¥969.5m worth of receivables due within a year. So it can boast CN¥438.4m more liquid assets than total liabilities.

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

The good news is that Jiangxi Guotai GroupLtd has increased its EBIT by 5.4% over twelve months, which should ease any concerns about debt repayment. 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 Jiangxi Guotai GroupLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangxi Guotai 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. Looking at the most recent three years, Jiangxi Guotai GroupLtd recorded free cash flow of 37% of its EBIT, which is weaker 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 Jiangxi Guotai GroupLtd has net cash of CN¥168.5m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 5.4% in the last twelve months. So we are not troubled with Jiangxi Guotai GroupLtd's debt use. 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 1 warning sign for Jiangxi Guotai GroupLtd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.