Does Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd (SHSE:601952) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Jiangsu Provincial Agricultural Reclamation and Development Co.,Ltd. (SHSE:601952) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd

What Is Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd had CN¥551.9m of debt in September 2024, down from CN¥791.3m, one year before. However, it does have CN¥2.21b in cash offsetting this, leading to net cash of CN¥1.66b.

How Strong Is Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd had liabilities of CN¥2.51b due within 12 months and liabilities of CN¥4.86b due beyond that. Offsetting this, it had CN¥2.21b in cash and CN¥994.2m in receivables that were due within 12 months. So its liabilities total CN¥4.16b more than the combination of its cash and short-term receivables.

Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has a market capitalization of CN¥14.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd'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. 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. Happily for any shareholders, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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¥1.66b. And it impressed us with free cash flow of CN¥1.0b, being 115% of its EBIT. So we don't have any problem with Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's use of debt. 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 1 warning sign for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd 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.