Here's Why Nantong Jiangshan Agrochemical & ChemicalsLtd (SHSE:600389) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Nantong Jiangshan Agrochemical & Chemicals Co.,Ltd. (SHSE:600389) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd

What Is Nantong Jiangshan Agrochemical & ChemicalsLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Nantong Jiangshan Agrochemical & ChemicalsLtd had debt of CN¥931.9m, up from CN¥602.5m in one year. However, its balance sheet shows it holds CN¥2.29b in cash, so it actually has CN¥1.35b net cash.

A Look At Nantong Jiangshan Agrochemical & ChemicalsLtd's Liabilities

According to the last reported balance sheet, Nantong Jiangshan Agrochemical & ChemicalsLtd had liabilities of CN¥2.36b due within 12 months, and liabilities of CN¥468.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.29b as well as receivables valued at CN¥498.1m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Nantong Jiangshan Agrochemical & ChemicalsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.29b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Nantong Jiangshan Agrochemical & ChemicalsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Nantong Jiangshan Agrochemical & ChemicalsLtd's saving grace is its low debt levels, because its EBIT has tanked 90% in the last twelve months. 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 it is future earnings, more than anything, that will determine Nantong Jiangshan Agrochemical & ChemicalsLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nantong Jiangshan Agrochemical & ChemicalsLtd 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 last three years, Nantong Jiangshan Agrochemical & ChemicalsLtd recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Nantong Jiangshan Agrochemical & ChemicalsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.35b. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥51m. So we don't have any problem with Nantong Jiangshan Agrochemical & ChemicalsLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Nantong Jiangshan Agrochemical & ChemicalsLtd that you should be aware of before investing here.

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.

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