We Think Kingchem (Liaoning) Life Science (SZSE:301509) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Kingchem (Liaoning) Life Science Co., Ltd. (SZSE:301509) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Kingchem (Liaoning) Life Science

What Is Kingchem (Liaoning) Life Science's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kingchem (Liaoning) Life Science had CN¥59.6m of debt in September 2023, down from CN¥81.9m, one year before. But it also has CN¥1.52b in cash to offset that, meaning it has CN¥1.46b net cash.

How Healthy Is Kingchem (Liaoning) Life Science's Balance Sheet?

We can see from the most recent balance sheet that Kingchem (Liaoning) Life Science had liabilities of CN¥227.6m falling due within a year, and liabilities of CN¥48.3m due beyond that. On the other hand, it had cash of CN¥1.52b and CN¥227.2m worth of receivables due within a year. So it can boast CN¥1.47b more liquid assets than total liabilities.

This surplus suggests that Kingchem (Liaoning) Life Science is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Kingchem (Liaoning) Life Science boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Kingchem (Liaoning) Life Science's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kingchem (Liaoning) Life Science'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, a company can only pay off debt with cold hard cash, not accounting profits. Kingchem (Liaoning) Life Science may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Kingchem (Liaoning) Life Science's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kingchem (Liaoning) Life Science has net cash of CN¥1.46b, as well as more liquid assets than liabilities. So we don't have any problem with Kingchem (Liaoning) Life Science's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kingchem (Liaoning) Life Science is showing 1 warning sign in our investment analysis , you should know about...

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.