Is Jiangsu ZongyiLTD (SHSE:600770) Using Debt In A Risky Way?

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. Importantly, Jiangsu Zongyi Co.,LTD (SHSE:600770) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiangsu ZongyiLTD

How Much Debt Does Jiangsu ZongyiLTD Carry?

You can click the graphic below for the historical numbers, but it shows that Jiangsu ZongyiLTD had CN¥234.1m of debt in September 2024, down from CN¥318.5m, one year before. However, it does have CN¥1.65b in cash offsetting this, leading to net cash of CN¥1.42b.

A Look At Jiangsu ZongyiLTD's Liabilities

The latest balance sheet data shows that Jiangsu ZongyiLTD had liabilities of CN¥414.3m due within a year, and liabilities of CN¥327.3m falling due after that. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥175.1m due within 12 months. So it can boast CN¥1.09b more liquid assets than total liabilities.

It's good to see that Jiangsu ZongyiLTD has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Jiangsu ZongyiLTD boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Jiangsu ZongyiLTD'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.

Over 12 months, Jiangsu ZongyiLTD made a loss at the EBIT level, and saw its revenue drop to CN¥300m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Jiangsu ZongyiLTD?

While Jiangsu ZongyiLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥7.9m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu ZongyiLTD is showing 2 warning signs in our investment analysis , 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.