Is China Jicheng Holdings (HKG:1027) Using Too Much 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. We note that China Jicheng Holdings Limited (HKG:1027) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 at December 2023 China Jicheng Holdings had debt of CN¥73.4m, up from CN¥68.1m in one year. On the flip side, it has CN¥38.5m in cash leading to net debt of about CN¥34.8m.

How Strong Is China Jicheng Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Jicheng Holdings had liabilities of CN¥142.5m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CN¥38.5m as well as receivables valued at CN¥114.9m due within 12 months. So it can boast CN¥11.0m more liquid assets than total liabilities.

This surplus suggests that China Jicheng Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Jicheng Holdings's earnings that will influence how the balance sheet holds up in the future. 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 17%, to CN¥294m. That's not what we would hope to see.

Caveat Emptor

Not only did China Jicheng Holdings'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¥94m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. Be aware that China Jicheng Holdings is showing 2 warning signs in our investment analysis , and 1 of those 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.