Does 5i5j Holding Group (SZSE:000560) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that 5i5j Holding Group Co., Ltd. (SZSE:000560) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for 5i5j Holding Group

What Is 5i5j Holding Group's Net Debt?

The image below, which you can click on for greater detail, shows that 5i5j Holding Group had debt of CN¥11.8b at the end of March 2024, a reduction from CN¥13.1b over a year. On the flip side, it has CN¥3.61b in cash leading to net debt of about CN¥8.23b.

How Strong Is 5i5j Holding Group's Balance Sheet?

We can see from the most recent balance sheet that 5i5j Holding Group had liabilities of CN¥15.9b falling due within a year, and liabilities of CN¥6.56b due beyond that. Offsetting these obligations, it had cash of CN¥3.61b as well as receivables valued at CN¥5.31b due within 12 months. So it has liabilities totalling CN¥13.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥6.36b 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, 5i5j Holding Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if 5i5j Holding Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year 5i5j Holding Group wasn't profitable at an EBIT level, but managed to grow its revenue by 3.1%, to CN¥12b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months 5i5j Holding Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥1.1b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥875m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. Be aware that 5i5j Holding Group is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.