These 4 Measures Indicate That Henan Jinyuan Hydrogenated Chemicals (HKG:2502) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Henan Jinyuan Hydrogenated Chemicals Co., Ltd. (HKG:2502) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Henan Jinyuan Hydrogenated Chemicals's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Henan Jinyuan Hydrogenated Chemicals had debt of CN¥334.0m, up from CN¥258.8m in one year. However, its balance sheet shows it holds CN¥352.6m in cash, so it actually has CN¥18.6m net cash.

A Look At Henan Jinyuan Hydrogenated Chemicals' Liabilities

Zooming in on the latest balance sheet data, we can see that Henan Jinyuan Hydrogenated Chemicals had liabilities of CN¥456.8m due within 12 months and liabilities of CN¥128.1m due beyond that. Offsetting these obligations, it had cash of CN¥352.6m as well as receivables valued at CN¥70.5m due within 12 months. So it has liabilities totalling CN¥161.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Henan Jinyuan Hydrogenated Chemicals is worth CN¥336.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Henan Jinyuan Hydrogenated Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Henan Jinyuan Hydrogenated Chemicals

Shareholders should be aware that Henan Jinyuan Hydrogenated Chemicals's EBIT was down 100% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Henan Jinyuan Hydrogenated Chemicals will need earnings to service that debt. 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 Henan Jinyuan Hydrogenated Chemicals 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. Over the most recent three years, Henan Jinyuan Hydrogenated Chemicals recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Henan Jinyuan Hydrogenated Chemicals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥18.6m. Despite the cash, we do find Henan Jinyuan Hydrogenated Chemicals's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Henan Jinyuan Hydrogenated Chemicals (of which 1 is significant!) you should know about.

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.