Is Zhejiang Jinke Tom Culture Industry (SZSE:300459) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Zhejiang Jinke Tom Culture Industry Co., LTD. (SZSE:300459) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhejiang Jinke Tom Culture Industry

What Is Zhejiang Jinke Tom Culture Industry's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Jinke Tom Culture Industry had debt of CN¥1.84b, up from CN¥1.57b in one year. However, it does have CN¥601.5m in cash offsetting this, leading to net debt of about CN¥1.24b.

A Look At Zhejiang Jinke Tom Culture Industry's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Jinke Tom Culture Industry had liabilities of CN¥1.60b due within 12 months and liabilities of CN¥453.0m due beyond that. Offsetting these obligations, it had cash of CN¥601.5m as well as receivables valued at CN¥193.2m due within 12 months. So it has liabilities totalling CN¥1.26b more than its cash and near-term receivables, combined.

Of course, Zhejiang Jinke Tom Culture Industry has a market capitalization of CN¥12.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Zhejiang Jinke Tom Culture Industry has a debt to EBITDA ratio of 3.5 and its EBIT covered its interest expense 2.7 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Even worse, Zhejiang Jinke Tom Culture Industry saw its EBIT tank 36% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Jinke Tom Culture Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Zhejiang Jinke Tom Culture Industry recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Zhejiang Jinke Tom Culture Industry's EBIT growth rate and interest cover definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. Looking at all the angles mentioned above, it does seem to us that Zhejiang Jinke Tom Culture Industry is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. While Zhejiang Jinke Tom Culture Industry didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.