Jinan Shengquan Group Share Holding (SHSE:605589) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jinan Shengquan Group Share Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jinan Shengquan Group Share Holding had CN¥2.09b of debt, an increase on CN¥1.31b, over one year. However, it also had CN¥1.08b in cash, and so its net debt is CN¥1.01b.

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

According to the last reported balance sheet, Jinan Shengquan Group Share Holding had liabilities of CN¥3.92b due within 12 months, and liabilities of CN¥553.0m due beyond 12 months. Offsetting this, it had CN¥1.08b in cash and CN¥3.56b in receivables that were due within 12 months. So it actually has CN¥171.7m more liquid assets than total liabilities.

This state of affairs indicates that Jinan Shengquan Group Share Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥24.1b company is struggling for cash, we still think it's worth monitoring its balance sheet.

See our latest analysis for Jinan Shengquan Group Share Holding

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Jinan Shengquan Group Share Holding has a low net debt to EBITDA ratio of only 0.61. And its EBIT covers its interest expense a whopping 98.3 times over. So we're pretty relaxed about its super-conservative use of debt. And we also note warmly that Jinan Shengquan Group Share Holding grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jinan Shengquan Group Share Holding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Jinan Shengquan Group Share Holding's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that Jinan Shengquan Group Share Holding's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Taking all this data into account, it seems to us that Jinan Shengquan Group Share Holding takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There's no doubt that we learn most about debt from the balance sheet. 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 1 warning sign for Jinan Shengquan Group Share Holding you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.