These 4 Measures Indicate That Jiashili Group (HKG:1285) Is Using Debt Extensively

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 Jiashili Group Limited (HKG:1285) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiashili Group

How Much Debt Does Jiashili Group Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Jiashili Group had debt of CN¥791.4m, up from CN¥609.1m in one year. On the flip side, it has CN¥339.4m in cash leading to net debt of about CN¥452.0m.

How Strong Is Jiashili Group's Balance Sheet?

According to the last reported balance sheet, Jiashili Group had liabilities of CN¥982.8m due within 12 months, and liabilities of CN¥282.3m due beyond 12 months. On the other hand, it had cash of CN¥339.4m and CN¥197.7m worth of receivables due within a year. So its liabilities total CN¥728.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥577.2m, we think shareholders really should watch Jiashili Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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.

Jiashili Group's net debt to EBITDA ratio of about 2.2 suggests only moderate use of debt. And its strong interest cover of 37.5 times, makes us even more comfortable. Pleasingly, Jiashili Group is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 271% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiashili Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. In the last three years, Jiashili Group's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

While Jiashili Group's level of total liabilities has us nervous. For example, its interest cover and EBIT growth rate give us some confidence in its ability to manage its debt. Looking at all the angles mentioned above, it does seem to us that Jiashili Group is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Jiashili Group you should be aware of, and 2 of them are significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.