These 4 Measures Indicate That Jiangxi Ganyue ExpresswayLTD (SHSE:600269) Is Using Debt Extensively

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jiangxi Ganyue Expressway CO.,LTD. (SHSE:600269) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangxi Ganyue ExpresswayLTD

How Much Debt Does Jiangxi Ganyue ExpresswayLTD Carry?

As you can see below, at the end of September 2024, Jiangxi Ganyue ExpresswayLTD had CN¥9.61b of debt, up from CN¥8.59b a year ago. Click the image for more detail. However, it also had CN¥4.03b in cash, and so its net debt is CN¥5.59b.

How Healthy Is Jiangxi Ganyue ExpresswayLTD's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Ganyue ExpresswayLTD had liabilities of CN¥7.75b falling due within a year, and liabilities of CN¥8.08b due beyond that. On the other hand, it had cash of CN¥4.03b and CN¥1.28b worth of receivables due within a year. So its liabilities total CN¥10.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥12.1b, so it does suggest shareholders should keep an eye on Jiangxi Ganyue ExpresswayLTD's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Jiangxi Ganyue ExpresswayLTD's net debt of 2.0 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 7.4 times its interest expenses harmonizes with that theme. Importantly Jiangxi Ganyue ExpresswayLTD's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangxi Ganyue ExpresswayLTD 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Jiangxi Ganyue ExpresswayLTD produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Jiangxi Ganyue ExpresswayLTD's level of total liabilities was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example, its interest cover is relatively strong. We should also note that Infrastructure industry companies like Jiangxi Ganyue ExpresswayLTD commonly do use debt without problems. Looking at all the angles mentioned above, it does seem to us that Jiangxi Ganyue ExpresswayLTD is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. We've identified 1 warning sign with Jiangxi Ganyue ExpresswayLTD , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.