Health Check: How Prudently Does Jiangsu SOPO Chemical (SHSE:600746) Use Debt?

Warren Buffett famously said, '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 note that Jiangsu SOPO Chemical Co. Ltd. (SHSE:600746) does have debt on its balance sheet. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jiangsu SOPO Chemical

What Is Jiangsu SOPO Chemical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu SOPO Chemical had CN¥230.0m of debt, an increase on none, over one year. But on the other hand it also has CN¥723.9m in cash, leading to a CN¥493.9m net cash position.

A Look At Jiangsu SOPO Chemical's Liabilities

We can see from the most recent balance sheet that Jiangsu SOPO Chemical had liabilities of CN¥1.05b falling due within a year, and liabilities of CN¥123.6m due beyond that. Offsetting this, it had CN¥723.9m in cash and CN¥567.4m in receivables that were due within 12 months. So it actually has CN¥118.2m more liquid assets than total liabilities.

This state of affairs indicates that Jiangsu SOPO Chemical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥7.42b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Jiangsu SOPO Chemical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu SOPO Chemical will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jiangsu SOPO Chemical made a loss at the EBIT level, and saw its revenue drop to CN¥5.1b, which is a fall of 38%. To be frank that doesn't bode well.

So How Risky Is Jiangsu SOPO Chemical?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Jiangsu SOPO Chemical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥657m of cash and made a loss of CN¥354m. Given it only has net cash of CN¥493.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 1 warning sign for Jiangsu SOPO Chemical you should be aware of.

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.

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.