Is Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd (SHSE:601952) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jiangsu Provincial Agricultural Reclamation and Development Co.,Ltd. (SHSE:601952) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd

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

As you can see below, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd had CN¥571.2m of debt at March 2024, down from CN¥944.5m a year prior. However, it does have CN¥2.95b in cash offsetting this, leading to net cash of CN¥2.38b.

A Look At Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd had liabilities of CN¥2.17b due within 12 months and liabilities of CN¥4.90b due beyond that. Offsetting these obligations, it had cash of CN¥2.95b as well as receivables valued at CN¥877.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.24b.

Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has a market capitalization of CN¥13.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. Ideally it can diminish its debt load by kick-starting earnings growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd 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 last three years, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd does have more liabilities than liquid assets, it also has net cash of CN¥2.38b. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in CN¥1.8b. So we are not troubled with Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd is showing 1 warning sign in our investment analysis , you should know about...

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.