Does Xinjiang GuannongLtd (SHSE:600251) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Xinjiang Guannong Co.,Ltd. (SHSE:600251) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Xinjiang GuannongLtd

What Is Xinjiang GuannongLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xinjiang GuannongLtd had CN¥1.33b of debt, an increase on CN¥1.07b, over one year. However, its balance sheet shows it holds CN¥1.93b in cash, so it actually has CN¥600.4m net cash.

How Strong Is Xinjiang GuannongLtd's Balance Sheet?

According to the last reported balance sheet, Xinjiang GuannongLtd had liabilities of CN¥1.67b due within 12 months, and liabilities of CN¥392.0m due beyond 12 months. Offsetting this, it had CN¥1.93b in cash and CN¥274.3m in receivables that were due within 12 months. So it can boast CN¥144.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Xinjiang GuannongLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xinjiang GuannongLtd 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 Xinjiang GuannongLtd if management cannot prevent a repeat of the 53% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Xinjiang GuannongLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Xinjiang GuannongLtd 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 two years, Xinjiang GuannongLtd generated free cash flow amounting to a very robust 98% 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 Xinjiang GuannongLtd has net cash of CN¥600.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥38m, being 98% of its EBIT. So we are not troubled with Xinjiang GuannongLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Xinjiang GuannongLtd 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.