Does Jiangsu Horizon Chain Supermarket (HKG:2625) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jiangsu Horizon Chain Supermarket Company Limited (HKG:2625) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jiangsu Horizon Chain Supermarket's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Jiangsu Horizon Chain Supermarket had CN¥569.5m of debt, an increase on CN¥478.8m, over one year. However, it does have CN¥167.9m in cash offsetting this, leading to net debt of about CN¥401.6m.

How Strong Is Jiangsu Horizon Chain Supermarket's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Horizon Chain Supermarket had liabilities of CN¥861.9m due within 12 months and liabilities of CN¥119.1m due beyond that. On the other hand, it had cash of CN¥167.9m and CN¥314.8m worth of receivables due within a year. So it has liabilities totalling CN¥498.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Jiangsu Horizon Chain Supermarket has a market capitalization of CN¥1.14b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

View our latest analysis for Jiangsu Horizon Chain Supermarket

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jiangsu Horizon Chain Supermarket has a debt to EBITDA ratio of 3.2 and its EBIT covered its interest expense 4.0 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Another concern for investors might be that Jiangsu Horizon Chain Supermarket's EBIT fell 10% in the last year. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Horizon Chain Supermarket'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Jiangsu Horizon Chain Supermarket reported free cash flow worth 3.6% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

To be frank both Jiangsu Horizon Chain Supermarket's EBIT growth rate and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But at least its level of total liabilities is not so bad. Overall, we think it's fair to say that Jiangsu Horizon Chain Supermarket has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangsu Horizon Chain Supermarket (of which 1 makes us a bit uncomfortable!) you should know about.

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.