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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Shanghai Jin Jiang Online Network Service Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Jin Jiang Online Network Service had CN¥43.4m in debt in September 2024; about the same as the year before. But it also has CN¥1.76b in cash to offset that, meaning it has CN¥1.71b net cash.

A Look At Shanghai Jin Jiang Online Network Service's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai Jin Jiang Online Network Service had liabilities of CN¥533.3m due within 12 months and liabilities of CN¥367.5m due beyond that. On the other hand, it had cash of CN¥1.76b and CN¥249.3m worth of receivables due within a year. So it actually has CN¥1.10b more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai Jin Jiang Online Network Service is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shanghai Jin Jiang Online Network Service has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Shanghai Jin Jiang Online Network Service

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¥7.2m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanghai Jin Jiang Online Network Service 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Jin Jiang Online Network Service has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Shanghai Jin Jiang Online Network Service burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥1.71b in net cash and a decent-looking balance sheet. So we don't have any problem with Shanghai Jin Jiang Online Network Service's use of debt. 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 instance, we've identified 3 warning signs for Shanghai Jin Jiang Online Network Service (1 is concerning) you should be aware of.

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.