China Jicheng Holdings (HKG:1027) Is Making Moderate Use Of Debt

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.' 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. Importantly, China Jicheng Holdings Limited (HKG:1027) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Jicheng Holdings

How Much Debt Does China Jicheng Holdings Carry?

As you can see below, at the end of June 2021, China Jicheng Holdings had CN¥101.4m of debt, up from CN¥42.9m a year ago. Click the image for more detail. On the flip side, it has CN¥81.8m in cash leading to net debt of about CN¥19.6m.

How Strong Is China Jicheng Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Jicheng Holdings had liabilities of CN¥163.5m falling due within a year, and liabilities of CN¥388.0k due beyond that. Offsetting this, it had CN¥81.8m in cash and CN¥111.3m in receivables that were due within 12 months. So it can boast CN¥29.2m more liquid assets than total liabilities.

It's good to see that China Jicheng Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But it is China Jicheng Holdings'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.

In the last year China Jicheng Holdings had a loss before interest and tax, and actually shrunk its revenue by 36%, to CN¥284m. To be frank that doesn't bode well.

Caveat Emptor

While China Jicheng Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥28m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with China Jicheng Holdings (including 2 which can't be ignored) .

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.
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