Does Zhejiang Xinan Chemical Industrial GroupLtd (SHSE:600596) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Zhejiang Xinan Chemical Industrial Group Co.,Ltd (SHSE:600596) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Xinan Chemical Industrial GroupLtd

What Is Zhejiang Xinan Chemical Industrial GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Xinan Chemical Industrial GroupLtd had debt of CN¥4.44b, up from CN¥3.01b in one year. But it also has CN¥5.04b in cash to offset that, meaning it has CN¥596.2m net cash.

How Healthy Is Zhejiang Xinan Chemical Industrial GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Xinan Chemical Industrial GroupLtd had liabilities of CN¥7.34b due within 12 months and liabilities of CN¥2.68b due beyond that. Offsetting this, it had CN¥5.04b in cash and CN¥3.06b in receivables that were due within 12 months. So its liabilities total CN¥1.93b more than the combination of its cash and short-term receivables.

Of course, Zhejiang Xinan Chemical Industrial GroupLtd has a market capitalization of CN¥11.9b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zhejiang Xinan Chemical Industrial GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Zhejiang Xinan Chemical Industrial GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 92% 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Xinan Chemical Industrial GroupLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Xinan Chemical Industrial GroupLtd 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. In the last three years, Zhejiang Xinan Chemical Industrial GroupLtd's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Zhejiang Xinan Chemical Industrial GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥596.2m. So we don't have any problem with Zhejiang Xinan Chemical Industrial GroupLtd'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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Zhejiang Xinan Chemical Industrial GroupLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.