Is Jianzhong Construction Development (HKG:589) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Jianzhong Construction Development Limited (HKG:589) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Jianzhong Construction Development

How Much Debt Does Jianzhong Construction Development Carry?

You can click the graphic below for the historical numbers, but it shows that Jianzhong Construction Development had CN¥124.0m of debt in June 2023, down from CN¥253.3m, one year before. However, its balance sheet shows it holds CN¥131.9m in cash, so it actually has CN¥7.84m net cash.

How Healthy Is Jianzhong Construction Development's Balance Sheet?

The latest balance sheet data shows that Jianzhong Construction Development had liabilities of CN¥597.4m due within a year, and liabilities of CN¥71.5m falling due after that. On the other hand, it had cash of CN¥131.9m and CN¥808.7m worth of receivables due within a year. So it can boast CN¥271.7m more liquid assets than total liabilities.

This surplus strongly suggests that Jianzhong Construction Development has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Jianzhong Construction Development boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jianzhong Construction Development 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.

In the last year Jianzhong Construction Development had a loss before interest and tax, and actually shrunk its revenue by 55%, to CN¥354m. That makes us nervous, to say the least.

So How Risky Is Jianzhong Construction Development?

Although Jianzhong Construction Development had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥119m. 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. The next few years will be important as the business matures. 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. Case in point: We've spotted 3 warning signs for Jianzhong Construction Development you should be aware of, and 1 of them is potentially serious.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.