These 4 Measures Indicate That Jiande International Holdings (HKG:865) Is Using Debt Extensively

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.' 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. We can see that Jiande International Holdings Limited (HKG:865) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jiande International Holdings

How Much Debt Does Jiande International Holdings Carry?

As you can see below, at the end of December 2021, Jiande International Holdings had CN¥133.7m of debt, up from CN¥79.4m a year ago. Click the image for more detail. But on the other hand it also has CN¥251.5m in cash, leading to a CN¥117.8m net cash position.

A Look At Jiande International Holdings' Liabilities

The latest balance sheet data shows that Jiande International Holdings had liabilities of CN¥610.6m due within a year, and liabilities of CN¥47.4m falling due after that. Offsetting these obligations, it had cash of CN¥251.5m as well as receivables valued at CN¥75.5m due within 12 months. So it has liabilities totalling CN¥330.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥379.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Jiande International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Jiande International Holdings's saving grace is its low debt levels, because its EBIT has tanked 90% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Jiande International Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Jiande International Holdings does have more liabilities than liquid assets, it also has net cash of CN¥117.8m. Despite the cash, we do find Jiande International Holdings's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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 - Jiande International Holdings has 3 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.