Is Jiangsu Zhengdan Chemical Industry (SZSE:300641) A Risky Investment?

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.' 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 can see that Jiangsu Zhengdan Chemical Industry Co., Ltd. (SZSE:300641) does use debt in its business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu Zhengdan Chemical Industry

What Is Jiangsu Zhengdan Chemical Industry's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Zhengdan Chemical Industry had CN¥190.8m of debt in September 2024, down from CN¥454.6m, one year before. But it also has CN¥1.12b in cash to offset that, meaning it has CN¥929.7m net cash.

A Look At Jiangsu Zhengdan Chemical Industry's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Zhengdan Chemical Industry had liabilities of CN¥446.6m due within 12 months and liabilities of CN¥2.56m due beyond that. Offsetting these obligations, it had cash of CN¥1.12b as well as receivables valued at CN¥841.3m due within 12 months. So it actually has CN¥1.51b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Zhengdan Chemical Industry has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Zhengdan Chemical Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Jiangsu Zhengdan Chemical Industry turned things around in the last 12 months, delivering and EBIT of CN¥940m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Zhengdan Chemical Industry's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Zhengdan Chemical Industry 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 year, Jiangsu Zhengdan Chemical Industry's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Zhengdan Chemical Industry has CN¥929.7m in net cash and a decent-looking balance sheet. So we don't have any problem with Jiangsu Zhengdan Chemical Industry's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Jiangsu Zhengdan Chemical Industry (1 is a bit concerning!) that you should be aware of before investing here.

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.