Here's Why Jiangsu Yangnong Chemical (SHSE:600486) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Jiangsu Yangnong Chemical Co., Ltd. (SHSE:600486) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangsu Yangnong Chemical

How Much Debt Does Jiangsu Yangnong Chemical Carry?

The image below, which you can click on for greater detail, shows that Jiangsu Yangnong Chemical had debt of CN¥547.1m at the end of September 2024, a reduction from CN¥817.1m over a year. But on the other hand it also has CN¥1.62b in cash, leading to a CN¥1.08b net cash position.

How Healthy Is Jiangsu Yangnong Chemical's Balance Sheet?

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. Offsetting these obligations, it had cash of CN¥1.62b as well as receivables valued at CN¥3.68b due within 12 months. So its liabilities total CN¥1.42b more than the combination of its cash and short-term receivables.

Given Jiangsu Yangnong Chemical has a market capitalization of CN¥21.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

The modesty of its debt load may become crucial for Jiangsu Yangnong Chemical if management cannot prevent a repeat of the 25% cut to EBIT 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 it is future earnings, more than anything, that will determine Jiangsu Yangnong Chemical's ability to maintain a healthy balance sheet going forward. 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. Jiangsu Yangnong Chemical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Jiangsu Yangnong Chemical recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiangsu Yangnong Chemical has CN¥1.08b in net cash. So we are not troubled with Jiangsu Yangnong Chemical's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Jiangsu Yangnong Chemical , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.