These 4 Measures Indicate That Shanghai Jin Jiang Online Network Service (SHSE:600650) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Jin Jiang Online Network Service

What Is Shanghai Jin Jiang Online Network Service's Debt?

As you can see below, Shanghai Jin Jiang Online Network Service had CN¥49.8m of debt at June 2024, down from CN¥57.9m a year prior. However, it does have CN¥1.67b in cash offsetting this, leading to net cash of CN¥1.62b.

How Strong Is Shanghai Jin Jiang Online Network Service's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Jin Jiang Online Network Service had liabilities of CN¥601.4m falling due within a year, and liabilities of CN¥342.6m due beyond that. On the other hand, it had cash of CN¥1.67b and CN¥328.2m worth of receivables due within a year. So it can boast CN¥1.05b more liquid assets than total liabilities.

This surplus suggests that Shanghai Jin Jiang Online Network Service is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shanghai Jin Jiang Online Network Service boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Shanghai Jin Jiang Online Network Service made a loss at the EBIT level, last year, it was also good to see that it generated CN¥14m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Jin Jiang Online Network Service's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Jin Jiang Online Network Service may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Shanghai Jin Jiang Online Network Service burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Jin Jiang Online Network Service has CN¥1.62b in net cash and a decent-looking balance sheet. So we are not troubled with Shanghai Jin Jiang Online Network Service's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Shanghai Jin Jiang Online Network Service has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

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.