Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Jiangsu Provincial Agricultural Reclamation and Development Co.,Ltd. (SHSE:601952) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd

How Much Debt Does Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd Carry?

As you can see below, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd had CN¥864.9m of debt at June 2023, down from CN¥1.11b a year prior. However, it does have CN¥2.12b in cash offsetting this, leading to net cash of CN¥1.26b.

A Look At Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Liabilities

We can see from the most recent balance sheet that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd had liabilities of CN¥2.64b falling due within a year, and liabilities of CN¥5.22b due beyond that. Offsetting these obligations, it had cash of CN¥2.12b as well as receivables valued at CN¥1.04b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.70b.

While this might seem like a lot, it is not so bad since Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has a market capitalization of CN¥16.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.26b. And it impressed us with free cash flow of CN¥1.8b, being 78% of its EBIT. So we are not troubled with Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's debt use. 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 1 warning sign with Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd , and understanding them should be part of your investment process.

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. 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.