Warren Buffett famously said, '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 China BlueChemical Ltd. (HKG:3983) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for China BlueChemical
What Is China BlueChemical's Debt?
The image below, which you can click on for greater detail, shows that China BlueChemical had debt of CN„921.1m at the end of June 2021, a reduction from CN„2.03b over a year. However, its balance sheet shows it holds CN„9.67b in cash, so it actually has CN„8.75b net cash.
How Healthy Is China BlueChemical's Balance Sheet?
We can see from the most recent balance sheet that China BlueChemical had liabilities of CN„3.86b falling due within a year, and liabilities of CN„194.9m due beyond that. Offsetting these obligations, it had cash of CN„9.67b as well as receivables valued at CN„1.01b due within 12 months. So it actually has CN„6.63b more liquid assets than total liabilities.
This luscious liquidity implies that China BlueChemical's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China BlueChemical boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, China BlueChemical grew its EBIT by 134% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China BlueChemical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China BlueChemical 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, China BlueChemical produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While it is always sensible to investigate a company's debt, in this case China BlueChemical has CN„8.75b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 134% over the last year. The bottom line is that China BlueChemical's use of debt is absolutely fine. 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. For example, we've discovered 3 warning signs for China BlueChemical (1 is a bit concerning!) that you should be aware of before investing here.
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.
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About SEHK:3983
China BlueChemical
Develops, produces, and sells mineral fertilizers and chemical products in the Peopleâs Republic of China and internationally.
Flawless balance sheet, undervalued and pays a dividend.
