These 4 Measures Indicate That ZJLD Group (HKG:6979) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that ZJLD Group Inc (HKG:6979) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ZJLD Group

What Is ZJLD Group's Net Debt?

As you can see below, ZJLD Group had CN¥36.6m of debt at December 2023, down from CN¥10.3b a year prior. But on the other hand it also has CN¥6.05b in cash, leading to a CN¥6.02b net cash position.

How Healthy Is ZJLD Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ZJLD Group had liabilities of CN¥4.85b due within 12 months and liabilities of CN¥49.1m due beyond that. Offsetting this, it had CN¥6.05b in cash and CN¥335.4m in receivables that were due within 12 months. So it can boast CN¥1.49b more liquid assets than total liabilities.

This surplus suggests that ZJLD Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ZJLD Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, ZJLD Group grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ZJLD Group can strengthen its balance sheet over time. 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. ZJLD 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. During the last three years, ZJLD Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case ZJLD Group has CN¥6.02b in net cash and a decent-looking balance sheet. And we liked the look of last year's 23% year-on-year EBIT growth. So we are not troubled with ZJLD Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for ZJLD Group (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.