Jiumaojiu International Holdings (HKG:9922) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Jiumaojiu International Holdings Limited (HKG:9922) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiumaojiu International Holdings

What Is Jiumaojiu International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Jiumaojiu International Holdings had CN¥201.3m of debt, an increase on CN¥20.0m, over one year. But it also has CN¥2.06b in cash to offset that, meaning it has CN¥1.86b net cash.

How Strong Is Jiumaojiu International Holdings' Balance Sheet?

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 these liquid assets roughly match the total liabilities.

This state of affairs indicates that Jiumaojiu International Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥9.47b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Jiumaojiu International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Jiumaojiu International Holdings grew its EBIT by 14% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiumaojiu International Holdings has CN¥1.86b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥336m. So we don't think Jiumaojiu International Holdings's use of debt is risky. We'd be very excited to see if Jiumaojiu International Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.