Anhui Jiangnan Chemical IndustryLtd (SZSE:002226) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We note that Anhui Jiangnan Chemical Industry Co.,Ltd. (SZSE:002226) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Anhui Jiangnan Chemical IndustryLtd

What Is Anhui Jiangnan Chemical IndustryLtd's Debt?

As you can see below, Anhui Jiangnan Chemical IndustryLtd had CN¥4.57b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥2.21b in cash, and so its net debt is CN¥2.36b.

How Healthy Is Anhui Jiangnan Chemical IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Anhui Jiangnan Chemical IndustryLtd had liabilities of CN¥4.02b due within 12 months, and liabilities of CN¥3.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.21b as well as receivables valued at CN¥5.12b due within 12 months. So it actually has CN¥197.8m more liquid assets than total liabilities.

Having regard to Anhui Jiangnan Chemical IndustryLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥14.4b company is short on cash, but still worth keeping an eye on the balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Anhui Jiangnan Chemical IndustryLtd's net debt is only 1.1 times its EBITDA. And its EBIT easily covers its interest expense, being 12.6 times the size. So we're pretty relaxed about its super-conservative use of debt. On top of that, Anhui Jiangnan Chemical IndustryLtd grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. 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 Anhui Jiangnan Chemical 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Anhui Jiangnan Chemical IndustryLtd recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that Anhui Jiangnan Chemical IndustryLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Looking at the bigger picture, we think Anhui Jiangnan Chemical IndustryLtd's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in Anhui Jiangnan Chemical IndustryLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.