We Think Jiande International Holdings (HKG:865) Can Stay On Top Of Its 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 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. We can see that Jiande International Holdings Limited (HKG:865) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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

How Much Debt Does Jiande International Holdings Carry?

As you can see below, at the end of June 2020, Jiande International Holdings had CN¥47.7m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥254.0m in cash, leading to a CN¥206.3m net cash position.

How Strong Is Jiande International Holdings's Balance Sheet?

We can see from the most recent balance sheet that Jiande International Holdings had liabilities of CN¥221.7m falling due within a year, and liabilities of CN¥24.6m due beyond that. Offsetting these obligations, it had cash of CN¥254.0m as well as receivables valued at CN¥3.33m due within 12 months. So it actually has CN¥11.0m more liquid assets than total liabilities.

This surplus suggests that Jiande International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 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 350% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiande International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jiande International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Jiande International Holdings recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Jiande International Holdings has CN¥206.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 350% over the last year. So we don't think Jiande International Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Jiande International Holdings has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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