Is Chenzhou City Jingui Silver Industry (SZSE:002716) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Chenzhou City Jingui Silver Industry Co., Ltd. (SZSE:002716) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chenzhou City Jingui Silver Industry

How Much Debt Does Chenzhou City Jingui Silver Industry Carry?

As you can see below, Chenzhou City Jingui Silver Industry had CN¥692.4m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥110.0m in cash leading to net debt of about CN¥582.4m.

A Look At Chenzhou City Jingui Silver Industry's Liabilities

We can see from the most recent balance sheet that Chenzhou City Jingui Silver Industry had liabilities of CN¥1.27b falling due within a year, and liabilities of CN¥975.3m due beyond that. Offsetting this, it had CN¥110.0m in cash and CN¥40.7m in receivables that were due within 12 months. So its liabilities total CN¥2.09b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Chenzhou City Jingui Silver Industry has a market capitalization of CN¥6.86b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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.

Weak interest cover of 0.18 times and a disturbingly high net debt to EBITDA ratio of 5.3 hit our confidence in Chenzhou City Jingui Silver Industry like a one-two punch to the gut. The debt burden here is substantial. However, the silver lining was that Chenzhou City Jingui Silver Industry achieved a positive EBIT of CN¥5.2m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chenzhou City Jingui Silver Industry will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Chenzhou City Jingui Silver Industry actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

We weren't impressed with Chenzhou City Jingui Silver Industry's net debt to EBITDA, and its interest cover made us cautious. But like a ballerina ending on a perfect pirouette, it has not trouble converting EBIT to free cash flow. Looking at all this data makes us feel a little cautious about Chenzhou City Jingui Silver Industry's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. We've identified 1 warning sign with Chenzhou City Jingui Silver Industry , and understanding them should be part of your investment process.

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.