Is Jiangsu Eastern ShenghongLtd (SZSE:000301) Weighed On By Its Debt Load?

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.' 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 Jiangsu Eastern Shenghong Co.,Ltd. (SZSE:000301) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu Eastern ShenghongLtd

What Is Jiangsu Eastern ShenghongLtd's Debt?

As you can see below, at the end of September 2024, Jiangsu Eastern ShenghongLtd had CN¥144.4b of debt, up from CN¥121.8b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥14.6b, its net debt is less, at about CN¥129.8b.

How Healthy Is Jiangsu Eastern ShenghongLtd's Balance Sheet?

According to the last reported balance sheet, Jiangsu Eastern ShenghongLtd had liabilities of CN¥92.5b due within 12 months, and liabilities of CN¥82.1b due beyond 12 months. Offsetting this, it had CN¥14.6b in cash and CN¥3.80b in receivables that were due within 12 months. So it has liabilities totalling CN¥156.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥56.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Jiangsu Eastern ShenghongLtd would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu Eastern ShenghongLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Jiangsu Eastern ShenghongLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to CN¥145b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Jiangsu Eastern ShenghongLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥791m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥9.3b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. To that end, you should be aware of the 2 warning signs we've spotted with Jiangsu Eastern ShenghongLtd .

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.