Shanghai Jinqiao Export Processing Zone DevelopmentLtd (SHSE:600639) Has No Shortage Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Shanghai Jinqiao Export Processing Zone Development Co.,Ltd (SHSE:600639) makes use of debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai Jinqiao Export Processing Zone DevelopmentLtd

What Is Shanghai Jinqiao Export Processing Zone DevelopmentLtd's Debt?

As you can see below, at the end of September 2024, Shanghai Jinqiao Export Processing Zone DevelopmentLtd had CN¥19.6b of debt, up from CN¥14.9b a year ago. Click the image for more detail. However, it does have CN¥5.24b in cash offsetting this, leading to net debt of about CN¥14.3b.

How Healthy Is Shanghai Jinqiao Export Processing Zone DevelopmentLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Jinqiao Export Processing Zone DevelopmentLtd had liabilities of CN¥13.9b due within 12 months and liabilities of CN¥14.0b due beyond that. Offsetting these obligations, it had cash of CN¥5.24b as well as receivables valued at CN¥243.2m due within 12 months. So its liabilities total CN¥22.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥11.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Shanghai Jinqiao Export Processing Zone DevelopmentLtd would probably need a major re-capitalization if its creditors were to demand repayment.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Shanghai Jinqiao Export Processing Zone DevelopmentLtd shareholders face the double whammy of a high net debt to EBITDA ratio (8.8), and fairly weak interest coverage, since EBIT is just 2.2 times the interest expense. This means we'd consider it to have a heavy debt load. Even worse, Shanghai Jinqiao Export Processing Zone DevelopmentLtd saw its EBIT tank 64% 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 Shanghai Jinqiao Export Processing Zone DevelopmentLtd 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Shanghai Jinqiao Export Processing Zone DevelopmentLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Shanghai Jinqiao Export Processing Zone DevelopmentLtd's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its net debt to EBITDA also fails to instill confidence. Considering everything we've mentioned above, it's fair to say that Shanghai Jinqiao Export Processing Zone DevelopmentLtd is carrying heavy debt load. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. 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. For example Shanghai Jinqiao Export Processing Zone DevelopmentLtd has 3 warning signs (and 2 which are significant) we think you should know about.

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.