Is Shaanxi Beiyuan Chemical Industry Group (SHSE:601568) Using Too Much 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.' 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. As with many other companies Shaanxi Beiyuan Chemical Industry Group Co., Ltd. (SHSE:601568) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shaanxi Beiyuan Chemical Industry Group

How Much Debt Does Shaanxi Beiyuan Chemical Industry Group Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Shaanxi Beiyuan Chemical Industry Group had debt of CN¥150.1m, up from none in one year. However, it does have CN¥4.63b in cash offsetting this, leading to net cash of CN¥4.48b.

A Look At Shaanxi Beiyuan Chemical Industry Group's Liabilities

The latest balance sheet data shows that Shaanxi Beiyuan Chemical Industry Group had liabilities of CN¥2.81b due within a year, and liabilities of CN¥180.1m falling due after that. Offsetting these obligations, it had cash of CN¥4.63b as well as receivables valued at CN¥1.16b due within 12 months. So it can boast CN¥2.80b more liquid assets than total liabilities.

This excess liquidity suggests that Shaanxi Beiyuan Chemical Industry Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shaanxi Beiyuan Chemical Industry Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Shaanxi Beiyuan Chemical Industry Group's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Shaanxi Beiyuan Chemical Industry Group's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shaanxi Beiyuan Chemical Industry Group 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. Happily for any shareholders, Shaanxi Beiyuan Chemical Industry Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shaanxi Beiyuan Chemical Industry Group has net cash of CN¥4.48b, as well as more liquid assets than liabilities. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in -CN¥87m. So we don't think Shaanxi Beiyuan Chemical Industry Group's use of debt is risky. 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. For instance, we've identified 4 warning signs for Shaanxi Beiyuan Chemical Industry Group (2 are a bit concerning) 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.

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