Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Nantong Jiangshan Agrochemical & Chemicals Co.,Ltd. (SHSE:600389) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd

What Is Nantong Jiangshan Agrochemical & ChemicalsLtd's Debt?

As you can see below, at the end of June 2022, Nantong Jiangshan Agrochemical & ChemicalsLtd had CN¥733.5m of debt, up from CN¥620.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.51b in cash, so it actually has CN¥1.78b net cash.

How Healthy Is Nantong Jiangshan Agrochemical & ChemicalsLtd's Balance Sheet?

We can see from the most recent balance sheet that Nantong Jiangshan Agrochemical & ChemicalsLtd had liabilities of CN¥2.85b falling due within a year, and liabilities of CN¥538.8m due beyond that. Offsetting this, it had CN¥2.51b in cash and CN¥1.50b in receivables that were due within 12 months. So it actually has CN¥613.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Nantong Jiangshan Agrochemical & ChemicalsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nantong Jiangshan Agrochemical & ChemicalsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Nantong Jiangshan Agrochemical & ChemicalsLtd grew its EBIT by 254% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nantong Jiangshan Agrochemical & ChemicalsLtd has net cash of CN¥1.78b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.7b, being 89% of its EBIT. So we don't think Nantong Jiangshan Agrochemical & ChemicalsLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Nantong Jiangshan Agrochemical & ChemicalsLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.