Would Jianzhong Construction Development (HKG:589) Be Better Off With Less Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jianzhong Construction Development Limited (HKG:589) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, 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 Jianzhong Construction Development

What Is Jianzhong Construction Development's Net Debt?

As you can see below, Jianzhong Construction Development had CN¥253.3m of debt at June 2022, down from CN¥330.9m a year prior. However, because it has a cash reserve of CN¥161.4m, its net debt is less, at about CN¥91.9m.

A Look At Jianzhong Construction Development's Liabilities

Zooming in on the latest balance sheet data, we can see that Jianzhong Construction Development had liabilities of CN¥821.2m due within 12 months and liabilities of CN¥164.7m due beyond that. Offsetting this, it had CN¥161.4m in cash and CN¥1.04b in receivables that were due within 12 months. So it can boast CN¥216.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Jianzhong Construction Development's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jianzhong Construction Development will need earnings to service that debt. 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.

Over 12 months, Jianzhong Construction Development made a loss at the EBIT level, and saw its revenue drop to CN¥789m, which is a fall of 38%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jianzhong Construction Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥202m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. 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 doesn't sit too well with us.

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.