Does Yunnan Shennong Agricultural Industry GroupLTD (SHSE:605296) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Yunnan Shennong Agricultural Industry Group Co.,LTD. (SHSE:605296) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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 Yunnan Shennong Agricultural Industry GroupLTD

What Is Yunnan Shennong Agricultural Industry GroupLTD's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Yunnan Shennong Agricultural Industry GroupLTD had debt of CN¥618.2m, up from CN¥459.2m in one year. But it also has CN¥951.7m in cash to offset that, meaning it has CN¥333.5m net cash.

How Strong Is Yunnan Shennong Agricultural Industry GroupLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yunnan Shennong Agricultural Industry GroupLTD had liabilities of CN¥1.35b due within 12 months and liabilities of CN¥451.2m due beyond that. Offsetting this, it had CN¥951.7m in cash and CN¥192.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥661.9m.

Given Yunnan Shennong Agricultural Industry GroupLTD has a market capitalization of CN¥15.7b, 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. While it does have liabilities worth noting, Yunnan Shennong Agricultural Industry GroupLTD also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Yunnan Shennong Agricultural Industry GroupLTD grew its EBIT by 157% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Yunnan Shennong Agricultural Industry GroupLTD 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 Yunnan Shennong Agricultural Industry GroupLTD 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 two years, Yunnan Shennong Agricultural Industry GroupLTD saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Yunnan Shennong Agricultural Industry GroupLTD's liabilities, but we can be reassured by the fact it has has net cash of CN¥333.5m. And it impressed us with its EBIT growth of 157% over the last year. So we don't have any problem with Yunnan Shennong Agricultural Industry GroupLTD'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. For instance, we've identified 1 warning sign for Yunnan Shennong Agricultural Industry GroupLTD that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.