Is Jinke Smart Services Group (HKG:9666) Using Debt 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. As with many other companies Jinke Smart Services Group Co., Ltd. (HKG:9666) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jinke Smart Services Group

What Is Jinke Smart Services Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jinke Smart Services Group had CN¥46.0m of debt, an increase on CN¥44.1m, over one year. But on the other hand it also has CN¥2.11b in cash, leading to a CN¥2.07b net cash position.

How Strong Is Jinke Smart Services Group's Balance Sheet?

According to the last reported balance sheet, Jinke Smart Services Group had liabilities of CN¥3.05b due within 12 months, and liabilities of CN¥180.5m due beyond 12 months. On the other hand, it had cash of CN¥2.11b and CN¥2.18b worth of receivables due within a year. So it actually has CN¥1.07b more liquid assets than total liabilities.

This excess liquidity suggests that Jinke Smart Services Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Jinke Smart Services Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Jinke Smart Services 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.

In the last year Jinke Smart Services Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Jinke Smart Services Group?

While Jinke Smart Services Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥134m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Jinke Smart Services Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.