Does Jilin Province Chuncheng Heating (HKG:1853) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Jilin Province Chuncheng Heating Company Limited (HKG:1853) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Jilin Province Chuncheng Heating

What Is Jilin Province Chuncheng Heating's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jilin Province Chuncheng Heating had CN¥80.8m of debt in June 2020, down from CN¥106.4m, one year before. But it also has CN¥494.0m in cash to offset that, meaning it has CN¥413.2m net cash.

How Strong Is Jilin Province Chuncheng Heating's Balance Sheet?

We can see from the most recent balance sheet that Jilin Province Chuncheng Heating had liabilities of CN¥530.4m falling due within a year, and liabilities of CN¥492.2m due beyond that. Offsetting this, it had CN¥494.0m in cash and CN¥446.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥82.7m.

Since publicly traded Jilin Province Chuncheng Heating shares are worth a total of CN¥1.22b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jilin Province Chuncheng Heating also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Jilin Province Chuncheng Heating saw its EBIT decline by 9.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jilin Province Chuncheng Heating 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jilin Province Chuncheng Heating 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. During the last three years, Jilin Province Chuncheng Heating burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Jilin Province Chuncheng Heating's liabilities, but we can be reassured by the fact it has has net cash of CN¥413.2m. So we are not troubled with Jilin Province Chuncheng Heating's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Jilin Province Chuncheng Heating (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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