Shenzhen Jinjia GroupLtd (SZSE:002191) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Shenzhen Jinjia Group Co.,Ltd. (SZSE:002191) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Jinjia GroupLtd

How Much Debt Does Shenzhen Jinjia GroupLtd Carry?

As you can see below, at the end of September 2023, Shenzhen Jinjia GroupLtd had CN¥385.7m of debt, up from CN¥18.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.18b in cash, leading to a CN¥796.5m net cash position.

How Healthy Is Shenzhen Jinjia GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Jinjia GroupLtd had liabilities of CN¥2.50b due within 12 months and liabilities of CN¥78.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.18b as well as receivables valued at CN¥2.14b due within 12 months. So it actually has CN¥736.5m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Jinjia GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Jinjia GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenzhen Jinjia GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Jinjia GroupLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Jinjia 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. Over the most recent three years, Shenzhen Jinjia GroupLtd recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Jinjia GroupLtd has net cash of CN¥796.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in CN¥582m. So we are not troubled with Shenzhen Jinjia GroupLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shenzhen Jinjia GroupLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.