Is Jiangsu SOPO Chemical (SHSE:600746) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jiangsu SOPO Chemical Co. Ltd. (SHSE:600746) does carry debt. 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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu SOPO Chemical

How Much Debt Does Jiangsu SOPO Chemical Carry?

As you can see below, Jiangsu SOPO Chemical had CN¥171.3m of debt at September 2024, down from CN¥230.0m a year prior. However, it does have CN¥789.8m in cash offsetting this, leading to net cash of CN¥618.5m.

A Look At Jiangsu SOPO Chemical's Liabilities

According to the last reported balance sheet, Jiangsu SOPO Chemical had liabilities of CN¥1.19b due within 12 months, and liabilities of CN¥39.9m due beyond 12 months. On the other hand, it had cash of CN¥789.8m and CN¥738.0m worth of receivables due within a year. So it actually has CN¥298.9m more liquid assets than total liabilities.

This surplus suggests that Jiangsu SOPO Chemical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu SOPO Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Jiangsu SOPO Chemical made a loss at the EBIT level, last year, it was also good to see that it generated CN¥457m in EBIT over the last twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangsu SOPO Chemical 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. Over the most recent year, Jiangsu SOPO Chemical recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu SOPO Chemical has net cash of CN¥618.5m, as well as more liquid assets than liabilities. So we don't think Jiangsu SOPO Chemical's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangsu SOPO Chemical's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.