Is Stanley Agriculture GroupLtd (SZSE:002588) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Stanley Agriculture Group Co.,Ltd. (SZSE:002588) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Stanley Agriculture GroupLtd

What Is Stanley Agriculture GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Stanley Agriculture GroupLtd had debt of CN¥824.4m, up from CN¥241.6m in one year. But it also has CN¥3.07b in cash to offset that, meaning it has CN¥2.24b net cash.

How Healthy Is Stanley Agriculture GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Stanley Agriculture GroupLtd had liabilities of CN¥4.11b falling due within a year, and liabilities of CN¥857.1m due beyond that. Offsetting these obligations, it had cash of CN¥3.07b as well as receivables valued at CN¥27.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.87b.

Stanley Agriculture GroupLtd has a market capitalization of CN¥7.98b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Stanley Agriculture GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Stanley Agriculture GroupLtd has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Stanley Agriculture GroupLtd can strengthen its balance sheet over time. 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. While Stanley Agriculture GroupLtd 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. In the last three years, Stanley Agriculture GroupLtd's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Stanley Agriculture GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥2.24b. And we liked the look of last year's 67% year-on-year EBIT growth. So we don't have any problem with Stanley Agriculture GroupLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Stanley Agriculture GroupLtd (including 1 which shouldn't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.