Does Jingrui Holdings (HKG:1862) Have A Healthy Balance Sheet?

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. Importantly, Jingrui Holdings Limited (HKG:1862) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Jingrui Holdings

What Is Jingrui Holdings's Debt?

The image below, which you can click on for greater detail, shows that Jingrui Holdings had debt of CN¥19.6b at the end of June 2023, a reduction from CN¥21.3b over a year. However, it does have CN¥1.30b in cash offsetting this, leading to net debt of about CN¥18.3b.

How Strong Is Jingrui Holdings' Balance Sheet?

We can see from the most recent balance sheet that Jingrui Holdings had liabilities of CN¥35.5b falling due within a year, and liabilities of CN¥4.29b due beyond that. Offsetting this, it had CN¥1.30b in cash and CN¥4.85b in receivables that were due within 12 months. So it has liabilities totalling CN¥33.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥47.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Jingrui Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jingrui Holdings will need earnings to service that debt. 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.

Over 12 months, Jingrui Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥8.0b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

While Jingrui Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥1.5b at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥4.2b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 4 warning signs for Jingrui Holdings you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.