Does Jiande International Holdings (HKG:865) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jiande International Holdings Limited (HKG:865) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiande International Holdings

What Is Jiande International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Jiande International Holdings had debt of CN¥79.4m, up from CN¥25.1m in one year. But on the other hand it also has CN¥160.4m in cash, leading to a CN¥81.0m net cash position.

How Strong Is Jiande International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Jiande International Holdings had liabilities of CN¥315.4m falling due within a year, and liabilities of CN¥25.9m due beyond that. Offsetting these obligations, it had cash of CN¥160.4m as well as receivables valued at CN¥39.1m due within 12 months. So it has liabilities totalling CN¥141.7m more than its cash and near-term receivables, combined.

Jiande International Holdings has a market capitalization of CN¥394.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jiande International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Jiande International Holdings grew its EBIT by 255% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiande International 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiande International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Jiande International Holdings's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Jiande International Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥81.0m. And it impressed us with its EBIT growth of 255% over the last year. So we don't have any problem with Jiande International Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Jiande International Holdings , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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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