Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Inner Mongolia Junzheng Energy & Chemical Group Co.,Ltd. (SHSE:601216) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Inner Mongolia Junzheng Energy & Chemical GroupLtd

What Is Inner Mongolia Junzheng Energy & Chemical GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Inner Mongolia Junzheng Energy & Chemical GroupLtd had debt of CN¥3.09b at the end of March 2024, a reduction from CN¥3.38b over a year. However, its balance sheet shows it holds CN¥3.73b in cash, so it actually has CN¥642.0m net cash.

A Look At Inner Mongolia Junzheng Energy & Chemical GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Inner Mongolia Junzheng Energy & Chemical GroupLtd had liabilities of CN¥8.85b due within 12 months and liabilities of CN¥3.20b due beyond that. Offsetting these obligations, it had cash of CN¥3.73b as well as receivables valued at CN¥2.04b due within 12 months. So it has liabilities totalling CN¥6.28b more than its cash and near-term receivables, combined.

Of course, Inner Mongolia Junzheng Energy & Chemical GroupLtd has a market capitalization of CN¥34.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Inner Mongolia Junzheng Energy & Chemical GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Inner Mongolia Junzheng Energy & Chemical GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Inner Mongolia Junzheng Energy & Chemical GroupLtd 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 Inner Mongolia Junzheng Energy & Chemical 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. Over the most recent three years, Inner Mongolia Junzheng Energy & Chemical GroupLtd recorded free cash flow worth 66% 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 Inner Mongolia Junzheng Energy & Chemical GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥642.0m. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in -CN¥1.4b. So we are not troubled with Inner Mongolia Junzheng Energy & Chemical GroupLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Inner Mongolia Junzheng Energy & Chemical GroupLtd that you should be aware of before investing here.

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.