Does Kunming Chuan Jin Nuo Chemical (SZSE:300505) Have A 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 Kunming Chuan Jin Nuo Chemical Co., Ltd. (SZSE:300505) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kunming Chuan Jin Nuo Chemical

What Is Kunming Chuan Jin Nuo Chemical's Net Debt?

As you can see below, Kunming Chuan Jin Nuo Chemical had CN¥695.9m of debt at June 2024, down from CN¥986.6m a year prior. However, its balance sheet shows it holds CN¥711.6m in cash, so it actually has CN¥15.7m net cash.

A Look At Kunming Chuan Jin Nuo Chemical's Liabilities

According to the last reported balance sheet, Kunming Chuan Jin Nuo Chemical had liabilities of CN¥899.6m due within 12 months, and liabilities of CN¥141.8m due beyond 12 months. On the other hand, it had cash of CN¥711.6m and CN¥410.4m worth of receivables due within a year. So it can boast CN¥80.6m more liquid assets than total liabilities.

Having regard to Kunming Chuan Jin Nuo Chemical'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¥4.55b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Kunming Chuan Jin Nuo Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Kunming Chuan Jin Nuo Chemical's EBIT fell a jaw-dropping 93% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kunming Chuan Jin Nuo Chemical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kunming Chuan Jin Nuo Chemical 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. During the last three years, Kunming Chuan Jin Nuo Chemical burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kunming Chuan Jin Nuo Chemical has net cash of CN¥15.7m, as well as more liquid assets than liabilities. Despite the cash, we do find Kunming Chuan Jin Nuo Chemical's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Kunming Chuan Jin Nuo Chemical , and understanding them should be part of your investment process.

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.