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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Qinghai Salt Lake Industry Co.,Ltd (SZSE:000792) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Qinghai Salt Lake IndustryLtd

How Much Debt Does Qinghai Salt Lake IndustryLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Qinghai Salt Lake IndustryLtd had CN¥6.82b of debt in September 2023, down from CN¥8.41b, one year before. But it also has CN¥24.5b in cash to offset that, meaning it has CN¥17.7b net cash.

A Look At Qinghai Salt Lake IndustryLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Qinghai Salt Lake IndustryLtd had liabilities of CN¥8.93b due within 12 months and liabilities of CN¥6.88b due beyond that. On the other hand, it had cash of CN¥24.5b and CN¥10.4b worth of receivables due within a year. So it actually has CN¥19.1b more liquid assets than total liabilities.

It's good to see that Qinghai Salt Lake IndustryLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Qinghai Salt Lake IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Qinghai Salt Lake IndustryLtd's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Qinghai Salt Lake IndustryLtd'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 company can only pay off debt with cold hard cash, not accounting profits. While Qinghai Salt Lake IndustryLtd 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. Over the most recent three years, Qinghai Salt Lake IndustryLtd recorded free cash flow worth 75% 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

While we empathize with investors who find debt concerning, you should keep in mind that Qinghai Salt Lake IndustryLtd has net cash of CN¥17.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in CN¥13b. So is Qinghai Salt Lake IndustryLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Qinghai Salt Lake IndustryLtd's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.