Is Jinan Shengquan Group Share Holding (SHSE:605589) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Jinan Shengquan Group Share Holding Co., Ltd. (SHSE:605589) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jinan Shengquan Group Share Holding

What Is Jinan Shengquan Group Share Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jinan Shengquan Group Share Holding had CN¥1.46b of debt, an increase on CN¥1.17b, over one year. However, it does have CN¥1.86b in cash offsetting this, leading to net cash of CN¥398.9m.

How Healthy Is Jinan Shengquan Group Share Holding's Balance Sheet?

We can see from the most recent balance sheet that Jinan Shengquan Group Share Holding had liabilities of CN¥3.54b falling due within a year, and liabilities of CN¥602.7m due beyond that. On the other hand, it had cash of CN¥1.86b and CN¥3.05b worth of receivables due within a year. So it can boast CN¥762.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Jinan Shengquan Group Share Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jinan Shengquan Group Share Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Jinan Shengquan Group Share Holding grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jinan Shengquan Group Share Holding 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jinan Shengquan Group Share Holding 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. During the last three years, Jinan Shengquan Group Share Holding burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jinan Shengquan Group Share Holding has net cash of CN¥398.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 13% over the last year. So we don't have any problem with Jinan Shengquan Group Share Holding's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jinan Shengquan Group Share Holding 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.

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

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.