Does Jiangsu Yangnong Chemical (SHSE:600486) Have A Healthy Balance Sheet?

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 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, Jiangsu Yangnong Chemical Co., Ltd. (SHSE:600486) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Jiangsu Yangnong Chemical

What Is Jiangsu Yangnong Chemical's Debt?

As you can see below, Jiangsu Yangnong Chemical had CN¥547.1m of debt at September 2024, down from CN¥817.1m a year prior. But it also has CN¥1.62b in cash to offset that, meaning it has CN¥1.08b net cash.

A Look At Jiangsu Yangnong Chemical's Liabilities

According to the last reported balance sheet, Jiangsu Yangnong Chemical had liabilities of CN¥6.45b due within 12 months, and liabilities of CN¥274.2m due beyond 12 months. On the other hand, it had cash of CN¥1.62b and CN¥3.68b worth of receivables due within a year. So its liabilities total CN¥1.42b more than the combination of its cash and short-term receivables.

Since publicly traded Jiangsu Yangnong Chemical shares are worth a total of CN¥23.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jiangsu Yangnong Chemical also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Jiangsu Yangnong Chemical's load is not too heavy, because its EBIT was down 25% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Yangnong Chemical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Yangnong 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, Jiangsu Yangnong Chemical produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Jiangsu Yangnong Chemical's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.08b. So we don't have any problem with Jiangsu Yangnong Chemical's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Jiangsu Yangnong Chemical that you should be aware of before investing here.

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.