We Think Jinan Shengquan Group Share Holding (SHSE:605589) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jinan Shengquan Group Share Holding Co., Ltd. (SHSE:605589) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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.

See our latest analysis for Jinan Shengquan Group Share Holding

What Is Jinan Shengquan Group Share Holding's Debt?

As you can see below, at the end of September 2024, Jinan Shengquan Group Share Holding had CN¥2.28b of debt, up from CN¥1.31b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.08b, its net debt is less, at about CN¥1.19b.

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. On the other hand, it had cash of CN¥1.08b and CN¥3.56b worth of receivables due within a year. So it can boast 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¥19.4b company is struggling for cash, we still think it's worth monitoring its balance sheet.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jinan Shengquan Group Share Holding has a low net debt to EBITDA ratio of only 0.72. 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. Also good is that Jinan Shengquan Group Share Holding grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 Jinan Shengquan Group Share Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Jinan Shengquan Group Share Holding recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Jinan Shengquan Group Share Holding's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Taking all this data into account, it seems to us that Jinan Shengquan Group Share Holding takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Jinan Shengquan Group Share Holding has 2 warning signs we think you should be aware of.

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.

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.