Jiangsu Zhengdan Chemical Industry (SZSE:300641) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 Jiangsu Zhengdan Chemical Industry Co., Ltd. (SZSE:300641) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Jiangsu Zhengdan Chemical Industry

How Much Debt Does Jiangsu Zhengdan Chemical Industry Carry?

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.

How Strong Is Jiangsu Zhengdan Chemical Industry's Balance Sheet?

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. On the other hand, it had cash of CN¥1.12b and CN¥841.3m worth of receivables due within a year. So it actually has CN¥1.51b more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Zhengdan Chemical Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Zhengdan Chemical Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Jiangsu Zhengdan Chemical Industry made a loss at the EBIT level, last year, it was also good to see that it generated CN¥940m in EBIT over the last twelve months. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Jiangsu Zhengdan Chemical Industry (1 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.