Here's Why Jiangsu Dagang (SZSE:002077) Can Afford Some 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. We note that Jiangsu Dagang Co., Ltd. (SZSE:002077) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Dagang

How Much Debt Does Jiangsu Dagang Carry?

As you can see below, at the end of March 2024, Jiangsu Dagang had CN¥597.8m of debt, up from CN¥495.5m a year ago. Click the image for more detail. However, it also had CN¥296.7m in cash, and so its net debt is CN¥301.1m.

How Healthy Is Jiangsu Dagang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Dagang had liabilities of CN¥540.3m due within 12 months and liabilities of CN¥363.5m due beyond that. On the other hand, it had cash of CN¥296.7m and CN¥107.9m worth of receivables due within a year. So its liabilities total CN¥499.1m more than the combination of its cash and short-term receivables.

Of course, Jiangsu Dagang has a market capitalization of CN¥7.92b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangsu Dagang will need earnings to service that debt. 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 Jiangsu Dagang had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥424m. That makes us nervous, to say the least.

Caveat Emptor

While Jiangsu Dagang's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥36m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥105m and a profit of CN¥27m. So one might argue that there's still a chance it can get things on the right track. 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. For example, we've discovered 2 warning signs for Jiangsu Dagang that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.