Jinxin Fertility Group (HKG:1951) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jinxin Fertility Group Limited (HKG:1951) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jinxin Fertility Group

How Much Debt Does Jinxin Fertility Group Carry?

As you can see below, at the end of June 2021, Jinxin Fertility Group had CN¥154.4m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥3.37b in cash, leading to a CN¥3.22b net cash position.

How Healthy Is Jinxin Fertility Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jinxin Fertility Group had liabilities of CN¥555.7m due within 12 months and liabilities of CN¥1.21b due beyond that. On the other hand, it had cash of CN¥3.37b and CN¥217.2m worth of receivables due within a year. So it can boast CN¥1.83b more liquid assets than total liabilities.

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

On the other hand, Jinxin Fertility Group saw its EBIT drop by 8.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jinxin Fertility Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 it is always sensible to investigate a company's debt, in this case Jinxin Fertility Group has CN¥3.22b in net cash and a decent-looking balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Jinxin Fertility Group you should be aware of.

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.

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.

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