Is Jinhui Shipping and Transportation (OB:JIN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jinhui Shipping and Transportation Limited (OB:JIN) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jinhui Shipping and Transportation

What Is Jinhui Shipping and Transportation's Net Debt?

As you can see below, Jinhui Shipping and Transportation had US$118.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$71.8m, its net debt is less, at about US$46.8m.

How Strong Is Jinhui Shipping and Transportation's Balance Sheet?

We can see from the most recent balance sheet that Jinhui Shipping and Transportation had liabilities of US$79.2m falling due within a year, and liabilities of US$57.6m due beyond that. On the other hand, it had cash of US$71.8m and US$15.4m worth of receivables due within a year. So its liabilities total US$49.7m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$51.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jinhui Shipping and Transportation 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.

In the last year Jinhui Shipping and Transportation had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$52m. That's not what we would hope to see.

Caveat Emptor

Not only did Jinhui Shipping and Transportation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$13m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$7.0m of cash over the last year. So suffice it to say we consider the stock very risky. 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 Jinhui Shipping and Transportation , 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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