Is Zhongnongfa Seed Industry Group (SHSE:600313) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zhongnongfa Seed Industry Group Co., Ltd. (SHSE:600313) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhongnongfa Seed Industry Group

What Is Zhongnongfa Seed Industry Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhongnongfa Seed Industry Group had debt of CN¥319.5m, up from CN¥230.6m in one year. But on the other hand it also has CN¥1.46b in cash, leading to a CN¥1.14b net cash position.

A Look At Zhongnongfa Seed Industry Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhongnongfa Seed Industry Group had liabilities of CN¥1.30b due within 12 months and liabilities of CN¥539.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.46b as well as receivables valued at CN¥605.9m due within 12 months. So it actually has CN¥228.9m more liquid assets than total liabilities.

This surplus suggests that Zhongnongfa Seed Industry Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhongnongfa Seed Industry Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Zhongnongfa Seed Industry Group's load is not too heavy, because its EBIT was down 25% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhongnongfa Seed Industry Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhongnongfa Seed Industry Group 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 three years, Zhongnongfa Seed Industry Group recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhongnongfa Seed Industry Group has CN¥1.14b in net cash and a decent-looking balance sheet. So we are not troubled with Zhongnongfa Seed Industry Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Zhongnongfa Seed Industry Group has 2 warning signs we think you should be aware of.

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.