Here's Why Xinjiang GuannongLtd (SHSE:600251) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Xinjiang Guannong Co.,Ltd. (SHSE:600251) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 Xinjiang GuannongLtd

What Is Xinjiang GuannongLtd's Net Debt?

As you can see below, Xinjiang GuannongLtd had CN¥1.28b of debt at September 2024, down from CN¥1.53b a year prior. But on the other hand it also has CN¥1.76b in cash, leading to a CN¥488.0m net cash position.

How Strong Is Xinjiang GuannongLtd's Balance Sheet?

We can see from the most recent balance sheet that Xinjiang GuannongLtd had liabilities of CN¥1.89b falling due within a year, and liabilities of CN¥421.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.76b as well as receivables valued at CN¥287.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥259.9m.

Given Xinjiang GuannongLtd has a market capitalization of CN¥5.47b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, 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 52% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xinjiang GuannongLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Looking at the most recent two years, Xinjiang GuannongLtd recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Xinjiang GuannongLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥488.0m. So we don't have any problem with Xinjiang GuannongLtd's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Xinjiang GuannongLtd .

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.