Is Jinan High-tech Development (SHSE:600807) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Jinan High-tech Development Co., Ltd. (SHSE:600807) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jinan High-tech Development

What Is Jinan High-tech Development's Debt?

The image below, which you can click on for greater detail, shows that Jinan High-tech Development had debt of CN¥489.1m at the end of September 2024, a reduction from CN¥560.2m over a year. However, it also had CN¥90.5m in cash, and so its net debt is CN¥398.6m.

How Strong Is Jinan High-tech Development's Balance Sheet?

We can see from the most recent balance sheet that Jinan High-tech Development had liabilities of CN¥1.43b falling due within a year, and liabilities of CN¥138.5m due beyond that. Offsetting this, it had CN¥90.5m in cash and CN¥629.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥849.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Jinan High-tech Development is worth CN¥3.70b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jinan High-tech Development's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Jinan High-tech Development had a loss before interest and tax, and actually shrunk its revenue by 53%, to CN¥481m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jinan High-tech Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥121m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥271m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Jinan High-tech Development that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.