Is Zhejiang Xinan Chemical Industrial GroupLtd (SHSE:600596) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Zhejiang Xinan Chemical Industrial Group Co.,Ltd (SHSE:600596) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhejiang Xinan Chemical Industrial GroupLtd

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

As you can see below, Zhejiang Xinan Chemical Industrial GroupLtd had CN¥3.31b of debt at September 2024, down from CN¥3.63b a year prior. But on the other hand it also has CN¥3.55b in cash, leading to a CN¥241.8m net cash position.

A Look At Zhejiang Xinan Chemical Industrial GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Xinan Chemical Industrial GroupLtd had liabilities of CN¥5.78b due within 12 months and liabilities of CN¥2.42b due beyond that. Offsetting these obligations, it had cash of CN¥3.55b as well as receivables valued at CN¥2.46b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.19b.

Of course, Zhejiang Xinan Chemical Industrial GroupLtd has a market capitalization of CN¥12.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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! 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Zhejiang Xinan Chemical Industrial GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥14b, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Zhejiang Xinan Chemical Industrial GroupLtd?

While Zhejiang Xinan Chemical Industrial GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥101m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Zhejiang Xinan Chemical Industrial GroupLtd has 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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.