Here's Why Guangzhou Jiacheng International LogisticsLtd (SHSE:603535) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Guangzhou Jiacheng International Logistics Co.,Ltd. (SHSE:603535) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View our latest analysis for Guangzhou Jiacheng International LogisticsLtd

What Is Guangzhou Jiacheng International LogisticsLtd's Net Debt?

As you can see below, at the end of September 2024, Guangzhou Jiacheng International LogisticsLtd had CN¥1.41b of debt, up from CN¥972.8m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥383.4m, its net debt is less, at about CN¥1.02b.

How Strong Is Guangzhou Jiacheng International LogisticsLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangzhou Jiacheng International LogisticsLtd had liabilities of CN¥942.3m falling due within a year, and liabilities of CN¥1.08b due beyond that. On the other hand, it had cash of CN¥383.4m and CN¥719.0m worth of receivables due within a year. So its liabilities total CN¥917.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Guangzhou Jiacheng International LogisticsLtd has a market capitalization of CN¥4.10b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Guangzhou Jiacheng International LogisticsLtd's debt is 3.6 times its EBITDA, and its EBIT cover its interest expense 5.3 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. If Guangzhou Jiacheng International LogisticsLtd can keep growing EBIT at last year's rate of 17% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangzhou Jiacheng International LogisticsLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Guangzhou Jiacheng International LogisticsLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Guangzhou Jiacheng International LogisticsLtd's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example, its EBIT growth rate is relatively strong. Looking at all the angles mentioned above, it does seem to us that Guangzhou Jiacheng International LogisticsLtd is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Guangzhou Jiacheng International LogisticsLtd (including 1 which can't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.