Is Jiahua Stores Holdings (HKG:602) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies Jiahua Stores Holdings Limited (HKG:602) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Jiahua Stores Holdings

What Is Jiahua Stores Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Jiahua Stores Holdings had CN¥66.9m of debt, an increase on none, over one year. However, it does have CN¥76.6m in cash offsetting this, leading to net cash of CN¥9.68m.

A Look At Jiahua Stores Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Jiahua Stores Holdings had liabilities of CN¥292.0m due within 12 months and liabilities of CN¥560.7m due beyond that. On the other hand, it had cash of CN¥76.6m and CN¥60.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥716.1m.

This deficit casts a shadow over the CN¥164.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Jiahua Stores Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Jiahua Stores Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 Jiahua Stores 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.

Over 12 months, Jiahua Stores Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥428m, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is Jiahua Stores Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jiahua Stores Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥52m and booked a CN¥194m accounting loss. With only CN¥9.68m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 2 warning signs for Jiahua Stores Holdings (1 is potentially serious!) that you should be aware of before investing here.

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. 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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