Here's Why COFCO Joycome Foods (HKG:1610) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that COFCO Joycome Foods Limited (HKG:1610) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for COFCO Joycome Foods

How Much Debt Does COFCO Joycome Foods Carry?

The image below, which you can click on for greater detail, shows that COFCO Joycome Foods had debt of CN¥4.73b at the end of December 2023, a reduction from CN¥7.18b over a year. On the flip side, it has CN¥1.18b in cash leading to net debt of about CN¥3.55b.

How Strong Is COFCO Joycome Foods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that COFCO Joycome Foods had liabilities of CN¥6.26b due within 12 months and liabilities of CN¥727.8m due beyond that. Offsetting this, it had CN¥1.18b in cash and CN¥640.7m in receivables that were due within 12 months. So its liabilities total CN¥5.17b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since COFCO Joycome Foods has a market capitalization of CN¥8.75b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine COFCO Joycome Foods'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.

In the last year COFCO Joycome Foods had a loss before interest and tax, and actually shrunk its revenue by 10%, to CN¥12b. That's not what we would hope to see.

Caveat Emptor

Not only did COFCO Joycome Foods's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.2b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥136m. So in short it's a really risky stock. For riskier companies like COFCO Joycome Foods I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.