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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Beijing Shunxin Agriculture Co.,Ltd (SZSE:000860) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Beijing Shunxin AgricultureLtd

What Is Beijing Shunxin AgricultureLtd's Debt?

The image below, which you can click on for greater detail, shows that Beijing Shunxin AgricultureLtd had debt of CN¥4.80b at the end of March 2024, a reduction from CN¥6.83b over a year. But it also has CN¥6.73b in cash to offset that, meaning it has CN¥1.93b net cash.

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¥5.35b due within 12 months and liabilities of CN¥1.54b due beyond that. On the other hand, it had cash of CN¥6.73b and CN¥360.9m worth of receivables due within a year. So it actually has CN¥202.3m more liquid assets than total liabilities.

Having regard to Beijing Shunxin AgricultureLtd'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¥13.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Beijing Shunxin AgricultureLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Beijing Shunxin AgricultureLtd grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its debt. 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 Beijing Shunxin AgricultureLtd 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, a company can only pay off debt with cold hard cash, not accounting profits. Beijing Shunxin AgricultureLtd 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. Happily for any shareholders, Beijing Shunxin AgricultureLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Shunxin AgricultureLtd has CN¥1.93b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥265m, being 107% of its EBIT. So we don't think Beijing Shunxin AgricultureLtd's use of debt is risky. Even though Beijing Shunxin AgricultureLtd lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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