These 4 Measures Indicate That Beijing Shunxin AgricultureLtd (SZSE:000860) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Beijing Shunxin Agriculture Co.,Ltd (SZSE:000860) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Shunxin AgricultureLtd

How Much Debt Does Beijing Shunxin AgricultureLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing Shunxin AgricultureLtd had CN¥4.94b of debt in September 2024, down from CN¥6.79b, one year before. But on the other hand it also has CN¥6.30b in cash, leading to a CN¥1.36b net cash position.

How Healthy Is Beijing Shunxin AgricultureLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Shunxin AgricultureLtd had liabilities of CN¥5.45b due within 12 months and liabilities of CN¥1.45b due beyond that. Offsetting these obligations, it had cash of CN¥6.30b as well as receivables valued at CN¥414.8m due within 12 months. So its liabilities total CN¥179.5m more than the combination of its cash and short-term receivables.

Having regard to Beijing Shunxin AgricultureLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥15.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Beijing Shunxin AgricultureLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Beijing Shunxin AgricultureLtd turned things around in the last 12 months, delivering and EBIT of CN¥443m. 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 Beijing Shunxin AgricultureLtd can strengthen its balance sheet over time. 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. While Beijing Shunxin AgricultureLtd 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 most recent year, Beijing Shunxin AgricultureLtd recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Beijing Shunxin AgricultureLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.36b. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CN¥296m. So we don't think Beijing Shunxin AgricultureLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Beijing Shunxin AgricultureLtd's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.