Jiangsu Dagang (SZSE:002077) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jiangsu Dagang Co., Ltd. (SZSE:002077) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jiangsu Dagang

What Is Jiangsu Dagang's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangsu Dagang had CN¥523.1m of debt, an increase on CN¥425.0m, over one year. However, because it has a cash reserve of CN¥251.4m, its net debt is less, at about CN¥271.6m.

How Healthy Is Jiangsu Dagang's Balance Sheet?

The latest balance sheet data shows that Jiangsu Dagang had liabilities of CN¥480.4m due within a year, and liabilities of CN¥361.0m falling due after that. Offsetting these obligations, it had cash of CN¥251.4m as well as receivables valued at CN¥107.0m due within 12 months. So it has liabilities totalling CN¥483.0m more than its cash and near-term receivables, combined.

Given Jiangsu Dagang has a market capitalization of CN¥7.82b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Dagang 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.

In the last year Jiangsu Dagang had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥408m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Jiangsu Dagang's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥34m at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥126m and the profit of CN¥21m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jiangsu Dagang has 2 warning signs we think you should be aware of.

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.