Here's Why Qinghai Salt Lake IndustryLtd (SZSE:000792) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Qinghai Salt Lake Industry Co.,Ltd (SZSE:000792) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Qinghai Salt Lake IndustryLtd

What Is Qinghai Salt Lake IndustryLtd's Debt?

The image below, which you can click on for greater detail, shows that Qinghai Salt Lake IndustryLtd had debt of CN¥4.60b at the end of September 2024, a reduction from CN¥6.82b over a year. But on the other hand it also has CN¥15.1b in cash, leading to a CN¥10.5b net cash position.

How Strong Is Qinghai Salt Lake IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Qinghai Salt Lake IndustryLtd had liabilities of CN¥9.14b due within a year, and liabilities of CN¥2.42b falling due after that. Offsetting this, it had CN¥15.1b in cash and CN¥6.54b in receivables that were due within 12 months. So it can boast CN¥10.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Qinghai Salt Lake IndustryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Qinghai Salt Lake IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Qinghai Salt Lake IndustryLtd's saving grace is its low debt levels, because its EBIT has tanked 49% 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 it is future earnings, more than anything, that will determine Qinghai Salt Lake IndustryLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Qinghai Salt Lake IndustryLtd 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 last three years, Qinghai Salt Lake IndustryLtd recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qinghai Salt Lake IndustryLtd has net cash of CN¥10.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥7.3b, being 86% of its EBIT. So we are not troubled with Qinghai Salt Lake IndustryLtd's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Qinghai Salt Lake IndustryLtd, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.