These 4 Measures Indicate That Zhejiang Xinan Chemical Industrial GroupLtd (SHSE:600596) Is Using Debt Extensively

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 more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at 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?

As you can see below, at the end of June 2024, Zhejiang Xinan Chemical Industrial GroupLtd had CN¥3.76b of debt, up from CN¥3.27b a year ago. Click the image for more detail. But it also has CN¥4.26b in cash to offset that, meaning it has CN¥496.8m net cash.

How Strong 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¥6.65b due within 12 months and liabilities of CN¥2.56b due beyond that. Offsetting these obligations, it had cash of CN¥4.26b as well as receivables valued at CN¥2.94b due within 12 months. So its liabilities total CN¥2.01b more than the combination of its cash and short-term receivables.

Given Zhejiang Xinan Chemical Industrial GroupLtd has a market capitalization of CN¥10.3b, it's hard to believe these liabilities pose much threat. 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 modesty of its debt load may become crucial for Zhejiang Xinan Chemical Industrial GroupLtd if management cannot prevent a repeat of the 90% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Xinan Chemical Industrial GroupLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Zhejiang Xinan Chemical Industrial GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥496.8m. So while Zhejiang Xinan Chemical Industrial GroupLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Zhejiang Xinan Chemical Industrial GroupLtd that you should be aware of.

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.