We Think Jiashili Group (HKG:1285) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jiashili Group Limited (HKG:1285) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See 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 2020 Jiashili Group had debt of CN¥510.0m, up from CN¥487.2m in one year. However, its balance sheet shows it holds CN¥542.2m in cash, so it actually has CN¥32.2m net cash.

A Look At Jiashili Group's Liabilities

We can see from the most recent balance sheet that Jiashili Group had liabilities of CN¥847.3m falling due within a year, and liabilities of CN¥69.3m due beyond that. Offsetting this, it had CN¥542.2m in cash and CN¥172.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥202.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Jiashili Group has a market capitalization of CN¥560.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jiashili Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Jiashili Group grew its EBIT by 12% 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 Jiashili Group's earnings that will influence how the balance sheet holds up in the future. 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. Jiashili Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Jiashili Group recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Jiashili Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥32.2m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in CN¥103m. So is Jiashili Group's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Jiashili Group you should know about.

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. 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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