We Think Henan Jinyuan Hydrogenated Chemicals (HKG:2502) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Henan Jinyuan Hydrogenated Chemicals Co., Ltd. (HKG:2502) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Henan Jinyuan Hydrogenated Chemicals

What Is Henan Jinyuan Hydrogenated Chemicals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Henan Jinyuan Hydrogenated Chemicals had CN¥258.8m of debt, an increase on CN¥165.1m, over one year. But on the other hand it also has CN¥300.7m in cash, leading to a CN¥41.9m net cash position.

A Look At Henan Jinyuan Hydrogenated Chemicals' Liabilities

We can see from the most recent balance sheet that Henan Jinyuan Hydrogenated Chemicals had liabilities of CN¥382.6m falling due within a year, and liabilities of CN¥153.4m due beyond that. On the other hand, it had cash of CN¥300.7m and CN¥110.6m worth of receivables due within a year. So its liabilities total CN¥124.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Henan Jinyuan Hydrogenated Chemicals is worth CN¥560.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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!

In fact Henan Jinyuan Hydrogenated Chemicals's saving grace is its low debt levels, because its EBIT has tanked 60% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Henan Jinyuan Hydrogenated Chemicals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Henan Jinyuan Hydrogenated Chemicals 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. During the last three years, Henan Jinyuan Hydrogenated Chemicals produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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¥41.9m. So we are not troubled with Henan Jinyuan Hydrogenated Chemicals's debt use. 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 instance, we've identified 3 warning signs for Henan Jinyuan Hydrogenated Chemicals that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com