19 Oct Jonathan Cartu Declares: Is Jinhui Shipping and Transportation (OB:JIN) Using Debt S
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. Importantly, Jinhui Shipping and Transportation Limited (OB:JIN) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Jinhui Shipping and Transportation’s Debt?
The chart below, which you can click on for greater detail, shows that Jinhui Shipping and Transportation had US$121.6m in debt in June 2020; about the same as the year before. However, it does have US$71.2m in cash offsetting this, leading to net debt of about US$50.4m.
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$79.5m falling due within a year, and liabilities of US$60.8m due beyond that. On the other hand, it had cash of US$71.2m and US$20.3m worth of receivables due within a year. So it has liabilities totalling US$48.9m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company’s US$40.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Jinhui Shipping and Transportation 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.
Over 12 months, Jinhui Shipping and Transportation made a loss at the EBIT level, and saw its revenue drop to US$54m, which is a fall of 14%. We would much prefer see growth.
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). Its EBIT loss was a whopping US$14m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$8.4m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we’ve spotted 1 warning sign for Jinhui Shipping and Transportation you should know about.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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