Is Jiumaojiu International Holdings (HKG:9922) A Risky Investment?

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. We can see that Jiumaojiu International Holdings Limited (HKG:9922) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jiumaojiu International Holdings

What Is Jiumaojiu International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Jiumaojiu International Holdings had debt of CN¥201.3m, up from CN¥20.0m in one year. But it also has CN¥2.06b in cash to offset that, meaning it has CN¥1.86b net cash.

A Look At Jiumaojiu International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Jiumaojiu International Holdings had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥1.53b due beyond that. Offsetting this, it had CN¥2.06b in cash and CN¥554.6m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Jiumaojiu International Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥17.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jiumaojiu International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Jiumaojiu International Holdings grew its EBIT at 20% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiumaojiu International Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiumaojiu International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Jiumaojiu International Holdings generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiumaojiu International Holdings has net cash of CN¥1.86b, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in CN¥304m. So we don't think Jiumaojiu International Holdings's use of debt is risky. Another factor that would give us confidence in Jiumaojiu International Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.