Yunnan Shennong Agricultural Industry GroupLTD (SHSE:605296) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Yunnan Shennong Agricultural Industry Group Co.,LTD. (SHSE:605296) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yunnan Shennong Agricultural Industry GroupLTD

How Much Debt Does Yunnan Shennong Agricultural Industry GroupLTD Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Yunnan Shennong Agricultural Industry GroupLTD had CN¥459.2m of debt, an increase on none, over one year. But on the other hand it also has CN¥784.8m in cash, leading to a CN¥325.6m net cash position.

A Look At Yunnan Shennong Agricultural Industry GroupLTD's Liabilities

We can see from the most recent balance sheet that Yunnan Shennong Agricultural Industry GroupLTD had liabilities of CN¥903.8m falling due within a year, and liabilities of CN¥350.5m due beyond that. Offsetting these obligations, it had cash of CN¥784.8m as well as receivables valued at CN¥164.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥305.4m.

Having regard to Yunnan Shennong Agricultural Industry GroupLTD's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥17.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Although Yunnan Shennong Agricultural Industry GroupLTD made a loss at the EBIT level, last year, it was also good to see that it generated CN¥91m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yunnan Shennong Agricultural Industry GroupLTD 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. Over the last year, 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Yunnan Shennong Agricultural Industry GroupLTD has CN¥325.6m in net cash. So we are not troubled with Yunnan Shennong Agricultural Industry GroupLTD's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Yunnan Shennong Agricultural Industry GroupLTD (at least 1 which is significant) , and understanding them should be part of your investment process.

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.