Stanley Agriculture GroupLtd (SZSE:002588) Seems To Use Debt Quite Sensibly

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. Importantly, Stanley Agriculture Group Co.,Ltd. (SZSE:002588) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Stanley Agriculture GroupLtd

How Much Debt Does Stanley Agriculture GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Stanley Agriculture GroupLtd had debt of CN¥734.2m, up from CN¥150.2m in one year. However, it does have CN¥2.92b in cash offsetting this, leading to net cash of CN¥2.19b.

How Healthy Is Stanley Agriculture GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Stanley Agriculture GroupLtd had liabilities of CN¥4.50b due within 12 months and liabilities of CN¥850.4m due beyond that. Offsetting this, it had CN¥2.92b in cash and CN¥54.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.37b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Stanley Agriculture GroupLtd has a market capitalization of CN¥8.64b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Stanley Agriculture GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Stanley Agriculture GroupLtd grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Stanley Agriculture GroupLtd'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 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. Considering the last three years, Stanley Agriculture GroupLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While Stanley Agriculture GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥2.19b. And it impressed us with its EBIT growth of 21% over the last year. 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. Be aware that Stanley Agriculture GroupLtd is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.

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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.