Is Jiande International Holdings (HKG:865) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Jiande International Holdings Limited (HKG:865) does carry debt. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiande International Holdings

How Much Debt Does Jiande International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Jiande International Holdings had CN¥90.7m of debt, an increase on CN¥47.7m, over one year. However, its balance sheet shows it holds CN¥157.6m in cash, so it actually has CN¥66.9m net cash.

How Strong Is Jiande International Holdings' Balance Sheet?

The latest balance sheet data shows that Jiande International Holdings had liabilities of CN¥487.7m due within a year, and liabilities of CN¥21.9m falling due after that. On the other hand, it had cash of CN¥157.6m and CN¥1.09m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥350.8m.

When you consider that this deficiency exceeds the company's CN¥334.7m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Jiande International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiande International Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jiande International Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥84m, which is a fall of 84%. That makes us nervous, to say the least.

So How Risky Is Jiande International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jiande International Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥94m of cash and made a loss of CN¥4.3m. Given it only has net cash of CN¥66.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 1 warning sign for Jiande International 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.

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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