Jiangsu Yangnong Chemical (SHSE:600486) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jiangsu Yangnong Chemical Co., Ltd. (SHSE:600486) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Yangnong Chemical

What Is Jiangsu Yangnong Chemical's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Yangnong Chemical had debt of CN¥941.5m, up from CN¥813.3m in one year. But it also has CN¥3.04b in cash to offset that, meaning it has CN¥2.10b net cash.

A Look At Jiangsu Yangnong Chemical's Liabilities

The latest balance sheet data shows that Jiangsu Yangnong Chemical had liabilities of CN¥6.69b due within a year, and liabilities of CN¥284.2m falling due after that. Offsetting this, it had CN¥3.04b in cash and CN¥3.75b in receivables that were due within 12 months. So its liabilities total CN¥181.6m more than the combination of its cash and short-term receivables.

Having regard to Jiangsu Yangnong Chemical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥25.5b company is short on cash, but still worth keeping an eye on the balance sheet. 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 32% cut to EBIT 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 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. 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. In the last three years, Jiangsu Yangnong Chemical's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥2.10b. So we don't have any problem with Jiangsu Yangnong Chemical'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 1 warning sign for Jiangsu Yangnong Chemical that you should be aware of before investing here.

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.

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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.