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

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. We can see that 5i5j Holding Group Co., Ltd. (SZSE:000560) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 at September 2024 5i5j Holding Group had debt of CN¥13.0b, up from CN¥11.6b in one year. However, because it has a cash reserve of CN¥3.69b, its net debt is less, at about CN¥9.27b.

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

Zooming in on the latest balance sheet data, we can see that 5i5j Holding Group had liabilities of CN¥16.6b due within 12 months and liabilities of CN¥6.29b due beyond that. Offsetting these obligations, it had cash of CN¥3.69b as well as receivables valued at CN¥6.22b due within 12 months. So its liabilities total CN¥13.0b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥7.54b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, 5i5j Holding Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine 5i5j Holding Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, 5i5j Holding Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, 5i5j Holding Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥1.1b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥772m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with 5i5j Holding Group , and understanding them should be part of your investment process.

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.