Health Check: How Prudently Does Jingrui Holdings (HKG:1862) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Jingrui Holdings Limited (HKG:1862) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jingrui Holdings

What Is Jingrui Holdings's Net Debt?

As you can see below, Jingrui Holdings had CN¥18.9b of debt at June 2023, down from CN¥21.3b a year prior. However, it also had CN¥1.30b in cash, and so its net debt is CN¥17.6b.

How Healthy Is Jingrui Holdings' Balance Sheet?

The latest balance sheet data shows that Jingrui Holdings had liabilities of CN¥35.5b due within a year, and liabilities of CN¥4.29b falling due after that. Offsetting these obligations, it had cash of CN¥1.30b as well as receivables valued at CN¥7.51b due within 12 months. So it has liabilities totalling CN¥31.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥73.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Jingrui Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Jingrui Holdings had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥8.0b. 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. Its EBIT loss was a whopping CN¥1.5b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jingrui Holdings has 4 warning signs (and 3 which are potentially serious) we think you should know about.

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.