Is Jiangsu Highway (HKG: 177) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Jiangsu Expressway Company Limited (HKG: 177) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels, together.
See our latest review for Jiangsu Expressway
What is Jiangsu Expressway’s net debt?
As you can see below, at the end of September 2021, Jiangsu Expressway was in debt of CNN 28.2 billion, up from CNN 23.8 billion a year ago. Click on the image for more details. However, it has CNN 2.80 billion in cash offsetting this, which leads to net debt of around CNN 25.4 billion.
How healthy is Jiangsu Expressway’s track record?
Zooming in on the latest balance sheet data, we can see that Jiangsu Expressway had debts of CN 14.8 billion due within 12 months and debts of CN 17.8 billion beyond. On the other hand, he had cash of CNS 2.80 billion and CN 492.5 million of receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by CN ¥ 29.3b.
This deficit is sizable compared to its market capitalization of 41.9 billion yen, so he suggests shareholders keep an eye on Jiangsu Expressway’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Jiangsu Expressway’s net debt is 4.0 times its EBITDA, which is significant but still reasonable leverage. However, its interest coverage of 1k is very high, which suggests that interest charges on debt are currently quite low. It is important to note that Jiangsu Expressway has increased its EBIT by 44% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Jiangsu Expressway can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. In the past three years, Jiangsu Expressway has reported free cash flow of 14% of its EBIT, which is really quite low. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
Jiangsu Expressway’s ability to cover its interest expense with its EBIT and its EBIT growth rate have reinforced our ability to manage its debt. On the other hand, its net debt to EBITDA makes us a little less comfortable with its debt. It should also be noted that Jiangsu Expressway belongs to the infrastructure sector, which is often considered quite defensive. Looking at all of this data, we feel a little cautious about Jiangsu Expressway’s debt levels. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – Jiangsu Expressway has 1 warning sign we think you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.