We Think Snowsky Salt Industry GroupLTD (SHSE:600929) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Snowsky Salt Industry Group CO.,LTD (SHSE:600929) 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Snowsky Salt Industry GroupLTD

How Much Debt Does Snowsky Salt Industry GroupLTD Carry?

As you can see below, Snowsky Salt Industry GroupLTD had CN¥160.9m of debt at March 2024, down from CN¥562.4m a year prior. However, it does have CN¥2.27b in cash offsetting this, leading to net cash of CN¥2.10b.

A Look At Snowsky Salt Industry GroupLTD's Liabilities

According to the last reported balance sheet, Snowsky Salt Industry GroupLTD had liabilities of CN¥2.79b due within 12 months, and liabilities of CN¥302.2m due beyond 12 months. Offsetting this, it had CN¥2.27b in cash and CN¥1.38b in receivables that were due within 12 months. So it can boast CN¥550.7m more liquid assets than total liabilities.

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

In fact Snowsky Salt Industry GroupLTD's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. 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 Snowsky Salt Industry 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Snowsky Salt Industry GroupLTD may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Snowsky Salt Industry GroupLTD recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Snowsky Salt Industry GroupLTD has CN¥2.10b in net cash and a decent-looking balance sheet. So we don't have any problem with Snowsky Salt Industry GroupLTD's use of debt. 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 instance, we've identified 2 warning signs for Snowsky Salt Industry GroupLTD that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.