Is China Jicheng Holdings (HKG:1027) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for China Jicheng Holdings

How Much Debt Does China Jicheng Holdings Carry?

The image below, which you can click on for greater detail, shows that China Jicheng Holdings had debt of CN¥74.2m at the end of June 2023, a reduction from CN¥113.8m over a year. However, it also had CN¥31.2m in cash, and so its net debt is CN¥43.0m.

How Strong Is China Jicheng Holdings' Balance Sheet?

According to the balance sheet data, China Jicheng Holdings had liabilities of CN¥157.5m due within 12 months, but no longer term liabilities. On the other hand, it had cash of CN¥31.2m and CN¥198.4m worth of receivables due within a year. So it can boast CN¥72.0m more liquid assets than total liabilities.

This surplus strongly suggests that China Jicheng Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Jicheng Holdings 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 China Jicheng Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to CN¥320m. We would much prefer see growth.

Caveat Emptor

Importantly, China Jicheng Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥32m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for China Jicheng Holdings (2 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.