Is Jinxin Fertility Group (HKG:1951) A Risky Investment?

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 note that Jinxin Fertility Group Limited (HKG:1951) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Jinxin Fertility Group

What Is Jinxin Fertility Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Jinxin Fertility Group had CN¥162.5m of debt, an increase on none, over one year. But it also has CN¥2.47b in cash to offset that, meaning it has CN¥2.31b net cash.

A Look At Jinxin Fertility Group's Liabilities

According to the last reported balance sheet, Jinxin Fertility Group had liabilities of CN¥555.1m due within 12 months, and liabilities of CN¥1.15b due beyond 12 months. Offsetting this, it had CN¥2.47b in cash and CN¥135.3m in receivables that were due within 12 months. So it can boast CN¥903.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Jinxin Fertility Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jinxin Fertility Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jinxin Fertility Group's load is not too heavy, because its EBIT was down 55% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jinxin Fertility Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jinxin Fertility 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. Looking at the most recent three years, Jinxin Fertility Group recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jinxin Fertility Group has net cash of CN¥2.31b, as well as more liquid assets than liabilities. So we don't have any problem with Jinxin Fertility Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Jinxin Fertility Group you should be aware of.

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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