We Think Jiangsu SOPO Chemical (SHSE:600746) Can Stay On Top Of Its Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jiangsu SOPO Chemical Co. Ltd. (SHSE:600746) 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiangsu SOPO Chemical

How Much Debt Does Jiangsu SOPO Chemical Carry?

As you can see below, at the end of March 2024, Jiangsu SOPO Chemical had CN¥513.5m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥793.6m in cash offsetting this, leading to net cash of CN¥280.1m.

How Strong Is Jiangsu SOPO Chemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu SOPO Chemical had liabilities of CN¥1.10b due within 12 months and liabilities of CN¥230.1m due beyond that. Offsetting this, it had CN¥793.6m in cash and CN¥563.2m in receivables that were due within 12 months. So these liquid assets roughly match the 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 while it's hard to imagine that the CN¥6.94b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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¥182m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu SOPO Chemical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last year, Jiangsu SOPO Chemical burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

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¥280.1m, as well as more liquid assets than liabilities. So we don't have any problem with Jiangsu SOPO Chemical's use of debt. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com