Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Nantong Jiangshan Agrochemical & Chemicals Co.,Ltd. (SHSE:600389) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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 September 2023 Nantong Jiangshan Agrochemical & ChemicalsLtd had CN¥807.6m of debt, an increase on CN¥635.0m, over one year. However, its balance sheet shows it holds CN¥2.44b in cash, so it actually has CN¥1.63b net cash.

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

According to the last reported balance sheet, Nantong Jiangshan Agrochemical & ChemicalsLtd had liabilities of CN¥1.83b due within 12 months, and liabilities of CN¥907.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.44b as well as receivables valued at CN¥321.5m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Nantong Jiangshan Agrochemical & ChemicalsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.80b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Nantong Jiangshan Agrochemical & ChemicalsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Nantong Jiangshan Agrochemical & ChemicalsLtd if management cannot prevent a repeat of the 81% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nantong Jiangshan Agrochemical & ChemicalsLtd 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. Nantong Jiangshan Agrochemical & ChemicalsLtd 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 last three years, Nantong Jiangshan Agrochemical & ChemicalsLtd recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nantong Jiangshan Agrochemical & ChemicalsLtd has CN¥1.63b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥517m, being 86% of its EBIT. So we are not troubled with Nantong Jiangshan Agrochemical & ChemicalsLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nantong Jiangshan Agrochemical & ChemicalsLtd is showing 2 warning signs in our investment analysis , you should know about...

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.