Jiuzhitang (SZSE:000989) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Jiuzhitang Co., Ltd. (SZSE:000989) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiuzhitang

What Is Jiuzhitang's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Jiuzhitang had debt of CN¥114.9m, up from CN¥64.0m in one year. But it also has CN¥903.9m in cash to offset that, meaning it has CN¥789.1m net cash.

How Healthy Is Jiuzhitang's Balance Sheet?

We can see from the most recent balance sheet that Jiuzhitang had liabilities of CN¥1.29b falling due within a year, and liabilities of CN¥93.5m due beyond that. Offsetting this, it had CN¥903.9m in cash and CN¥1.02b in receivables that were due within 12 months. So it can boast CN¥542.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiuzhitang could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jiuzhitang has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Jiuzhitang has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiuzhitang's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jiuzhitang 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. During the last three years, Jiuzhitang produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiuzhitang has net cash of CN¥789.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Jiuzhitang's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Jiuzhitang you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com