Does Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd (SHSE:603227) Have A 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. As with many other companies Xinjiang Xuefeng Sci-Tech(Group)Co.,Ltd (SHSE:603227) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd

What Is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd had CN¥822.5m of debt in September 2024, down from CN¥987.3m, one year before. However, its balance sheet shows it holds CN¥1.03b in cash, so it actually has CN¥208.5m net cash.

A Look At Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's Liabilities

We can see from the most recent balance sheet that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd had liabilities of CN¥1.57b falling due within a year, and liabilities of CN¥711.4m due beyond that. On the other hand, it had cash of CN¥1.03b and CN¥1.76b worth of receivables due within a year. So it actually has CN¥509.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd saw its EBIT drop by 3.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd 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. During the last three years, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has CN¥208.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in CN¥853m. So is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd , and understanding them should be part of your investment process.

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.

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

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.