Jiayou International LogisticsLtd (SHSE:603871) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Jiayou International Logistics Co.,Ltd (SHSE:603871) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiayou International LogisticsLtd

How Much Debt Does Jiayou International LogisticsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiayou International LogisticsLtd had CN¥126.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥1.71b in cash, so it actually has CN¥1.58b net cash.

A Look At Jiayou International LogisticsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiayou International LogisticsLtd had liabilities of CN¥1.48b due within 12 months and liabilities of CN¥48.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.71b as well as receivables valued at CN¥534.5m due within 12 months. So it actually has CN¥709.2m more liquid assets than total liabilities.

This surplus suggests that Jiayou International LogisticsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiayou International LogisticsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Jiayou International LogisticsLtd has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiayou International LogisticsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiayou International LogisticsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Jiayou International LogisticsLtd reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiayou International LogisticsLtd has net cash of CN¥1.58b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So is Jiayou International LogisticsLtd's debt a risk? It doesn't seem so to us. 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. For example - Jiayou International LogisticsLtd has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com