Is Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Zhejiang Jiahua Energy Chemical Industry Co.,Ltd. (SHSE:600273) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Zhejiang Jiahua Energy Chemical IndustryLtd

How Much Debt Does Zhejiang Jiahua Energy Chemical IndustryLtd Carry?

As you can see below, Zhejiang Jiahua Energy Chemical IndustryLtd had CN¥450.1m of debt at September 2023, down from CN¥682.7m a year prior. But it also has CN¥774.1m in cash to offset that, meaning it has CN¥324.0m net cash.

How Strong Is Zhejiang Jiahua Energy Chemical IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Jiahua Energy Chemical IndustryLtd had liabilities of CN¥1.70b due within 12 months, and liabilities of CN¥125.1m due beyond 12 months. On the other hand, it had cash of CN¥774.1m and CN¥1.70b worth of receivables due within a year. So it actually has CN¥652.5m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Jiahua Energy Chemical IndustryLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhejiang Jiahua Energy Chemical IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Zhejiang Jiahua Energy Chemical IndustryLtd's load is not too heavy, because its EBIT was down 42% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Zhejiang Jiahua Energy Chemical IndustryLtd 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 Zhejiang Jiahua Energy Chemical IndustryLtd 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. In the last three years, Zhejiang Jiahua Energy Chemical IndustryLtd's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Jiahua Energy Chemical IndustryLtd has CN¥324.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Zhejiang Jiahua Energy Chemical IndustryLtd's use of debt. 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. For instance, we've identified 1 warning sign for Zhejiang Jiahua Energy Chemical IndustryLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.