These 4 Measures Indicate That Yunnan Shennong Agricultural Industry GroupLTD (SHSE:605296) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Yunnan Shennong Agricultural Industry Group Co.,LTD. (SHSE:605296) does carry debt. But is this debt a concern to shareholders?

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. 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, 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.

Check out our latest analysis for Yunnan Shennong Agricultural Industry GroupLTD

What Is Yunnan Shennong Agricultural Industry GroupLTD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Yunnan Shennong Agricultural Industry GroupLTD had CN¥618.2m of debt, an increase on CN¥459.2m, over one year. However, it does have CN¥951.7m in cash offsetting this, leading to net cash of CN¥333.5m.

A Look At Yunnan Shennong Agricultural Industry GroupLTD's Liabilities

According to the last reported balance sheet, Yunnan Shennong Agricultural Industry GroupLTD had liabilities of CN¥1.35b due within 12 months, and liabilities of CN¥451.2m due beyond 12 months. On the other hand, it had cash of CN¥951.7m and CN¥192.2m worth of receivables due within a year. 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¥14.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Even more impressive was the fact that Yunnan Shennong Agricultural Industry GroupLTD grew its EBIT by 127% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yunnan Shennong Agricultural Industry GroupLTD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 that may be a result of expenditure for growth, it does make the debt far 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 we liked the look of last year's 127% year-on-year EBIT growth. 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 example, we've discovered 1 warning sign for Yunnan Shennong Agricultural Industry GroupLTD that you should be aware of before investing here.

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.