Does Chengdu Gas Group (SHSE:603053) Have A Healthy Balance Sheet?

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.' 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. We can see that Chengdu Gas Group Corporation Ltd. (SHSE:603053) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chengdu Gas Group

What Is Chengdu Gas Group's Debt?

The chart below, which you can click on for greater detail, shows that Chengdu Gas Group had CN¥60.6m in debt in June 2024; about the same as the year before. But it also has CN¥3.25b in cash to offset that, meaning it has CN¥3.19b net cash.

How Strong Is Chengdu Gas Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chengdu Gas Group had liabilities of CN¥3.39b due within 12 months and liabilities of CN¥222.4m due beyond that. Offsetting these obligations, it had cash of CN¥3.25b as well as receivables valued at CN¥143.6m due within 12 months. So it has liabilities totalling CN¥219.8m more than its cash and near-term receivables, combined.

Given Chengdu Gas Group has a market capitalization of CN¥7.47b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Chengdu Gas Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Chengdu Gas Group has seen its EBIT plunge 16% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chengdu Gas Group'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. While Chengdu Gas Group 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. Happily for any shareholders, Chengdu Gas Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Chengdu Gas Group has CN¥3.19b in net cash. And it impressed us with free cash flow of CN¥836m, being 168% of its EBIT. So we don't think Chengdu Gas Group's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Chengdu Gas Group .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.