Is Qinghai Salt Lake IndustryLtd (SZSE:000792) A Risky Investment?

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 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Qinghai Salt Lake IndustryLtd

How Much Debt Does Qinghai Salt Lake IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Qinghai Salt Lake IndustryLtd had debt of CN¥4.67b at the end of March 2024, a reduction from CN¥6.82b over a year. But on the other hand it also has CN¥21.9b in cash, leading to a CN¥17.2b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Qinghai Salt Lake IndustryLtd had liabilities of CN¥8.97b due within 12 months and liabilities of CN¥2.35b due beyond that. On the other hand, it had cash of CN¥21.9b and CN¥6.82b worth of receivables due within a year. So it can boast CN¥17.4b more liquid assets than total liabilities.

This excess liquidity suggests that Qinghai Salt Lake IndustryLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Qinghai Salt Lake IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Qinghai Salt Lake IndustryLtd's load is not too heavy, because its EBIT was down 58% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Qinghai Salt Lake IndustryLtd 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. Over the last three years, Qinghai Salt Lake IndustryLtd recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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¥17.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥11b. So is Qinghai Salt Lake IndustryLtd'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. Case in point: We've spotted 1 warning sign for Qinghai Salt Lake IndustryLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.