Is Jiangsu ZongyiLTD (SHSE:600770) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Jiangsu Zongyi Co.,LTD (SHSE:600770) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiangsu ZongyiLTD

What Is Jiangsu ZongyiLTD's Debt?

The image below, which you can click on for greater detail, shows that Jiangsu ZongyiLTD had debt of CN¥318.5m at the end of September 2023, a reduction from CN¥395.7m over a year. However, it does have CN¥1.42b in cash offsetting this, leading to net cash of CN¥1.11b.

How Healthy Is Jiangsu ZongyiLTD's Balance Sheet?

According to the last reported balance sheet, Jiangsu ZongyiLTD had liabilities of CN¥497.1m due within 12 months, and liabilities of CN¥323.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.42b as well as receivables valued at CN¥183.4m due within 12 months. So it actually has CN¥787.8m more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu ZongyiLTD is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jiangsu ZongyiLTD boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu ZongyiLTD's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Jiangsu ZongyiLTD made a loss at the EBIT level, and saw its revenue drop to CN¥345m, which is a fall of 8.2%. 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 generated positive free cash flow CN¥110m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangsu ZongyiLTD you should know about.

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.