These 4 Measures Indicate That Kunming Chuan Jin Nuo Chemical (SZSE:300505) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Kunming Chuan Jin Nuo Chemical Co., Ltd. (SZSE:300505) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Kunming Chuan Jin Nuo Chemical

How Much Debt Does Kunming Chuan Jin Nuo Chemical Carry?

You can click the graphic below for the historical numbers, but it shows that Kunming Chuan Jin Nuo Chemical had CN¥634.7m of debt in September 2024, down from CN¥986.6m, one year before. But it also has CN¥699.6m in cash to offset that, meaning it has CN¥64.8m net cash.

A Look At Kunming Chuan Jin Nuo Chemical's Liabilities

Zooming in on the latest balance sheet data, we can see that Kunming Chuan Jin Nuo Chemical had liabilities of CN¥937.6m due within 12 months and liabilities of CN¥141.7m due beyond that. Offsetting this, it had CN¥699.6m in cash and CN¥349.5m in receivables that were due within 12 months. So its liabilities total CN¥30.2m more than the combination of its cash and short-term receivables.

Having regard to Kunming Chuan Jin Nuo Chemical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.76b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Kunming Chuan Jin Nuo Chemical 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, Kunming Chuan Jin Nuo Chemical turned things around in the last 12 months, delivering and EBIT of CN¥138m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kunming Chuan Jin Nuo Chemical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last year, Kunming Chuan Jin Nuo Chemical actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kunming Chuan Jin Nuo Chemical has CN¥64.8m in net cash. So we are not troubled with Kunming Chuan Jin Nuo Chemical'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. To that end, you should learn about the 2 warning signs we've spotted with Kunming Chuan Jin Nuo Chemical (including 1 which is potentially serious) .

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.