Jiayou International LogisticsLtd (SHSE:603871) Has A Rock Solid Balance Sheet

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.' 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. We can see that Jiayou International Logistics Co.,Ltd (SHSE:603871) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiayou International LogisticsLtd

What Is Jiayou International LogisticsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiayou International LogisticsLtd had CN¥138.1m of debt, an increase on CN¥30.0m, over one year. However, its balance sheet shows it holds CN¥1.44b in cash, so it actually has CN¥1.31b net cash.

How Healthy Is Jiayou International LogisticsLtd's Balance Sheet?

The latest balance sheet data shows that Jiayou International LogisticsLtd had liabilities of CN¥2.41b due within a year, and liabilities of CN¥65.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥860.5m due within 12 months. So its liabilities total CN¥170.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Jiayou International LogisticsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥18.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jiayou International LogisticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jiayou International LogisticsLtd grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiayou International LogisticsLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiayou International LogisticsLtd 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. Over the most recent three years, Jiayou International LogisticsLtd recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Jiayou International LogisticsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.31b. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think Jiayou International LogisticsLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jiayou International LogisticsLtd is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.