The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Nantong Jiangshan Agrochemical & Chemicals Co.,Ltd. (SHSE:600389) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Nantong Jiangshan Agrochemical & ChemicalsLtd
How Much Debt Does Nantong Jiangshan Agrochemical & ChemicalsLtd Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Nantong Jiangshan Agrochemical & ChemicalsLtd had CN¥629.3m of debt, an increase on CN¥605.0m, over one year. But it also has CN¥1.61b in cash to offset that, meaning it has CN¥979.2m net cash.SHSE:600389 Debt to Equity History June 19th 2022
A Look At Nantong Jiangshan Agrochemical & ChemicalsLtd's Liabilities
According to the last reported balance sheet , Nantong Jiangshan Agrochemical & ChemicalsLtd had liabilities of CN¥2.70b due within 12 months, and liabilities of CN¥480.0m due beyond 12 months. On the other hand, it had cash of CN¥1.61b and CN¥1.33b worth of receivables due within a year. So it has liabilities totalling CN¥242.5m more than its cash and near-term receivables, combined.
Having regard to Nantong Jiangshan Agrochemical & ChemicalsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥19.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Nantong Jiangshan Agrochemical & ChemicalsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Nantong Jiangshan Agrochemical & ChemicalsLtd grew its EBIT by 269% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nantong Jiangshan Agrochemical & ChemicalsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nantong Jiangshan Agrochemical & ChemicalsLtd 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, Nantong Jiangshan Agrochemical & ChemicalsLtd generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
We could understand if investors are concerned about Nantong Jiangshan Agrochemical & ChemicalsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥979.2m. And it impressed us with free cash flow of CN¥1.3b, being 92% of its EBIT. So we don't think Nantong Jiangshan Agrochemical & ChemicalsLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Nantong Jiangshan Agrochemical & ChemicalsLtd , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.