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. Importantly, Qinghai Salt Lake Industry Co.,Ltd (SZSE:000792) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Qinghai Salt Lake IndustryLtd's Debt?

As you can see below, Qinghai Salt Lake IndustryLtd had CN¥4.67b of debt at March 2024, down from CN¥6.82b a year prior. But on the other hand it also has CN¥21.9b in cash, leading to a CN¥17.2b net cash position.

How Healthy Is Qinghai Salt Lake IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Qinghai Salt Lake IndustryLtd had liabilities of CN¥8.97b due within a year, and liabilities of CN¥2.35b falling due after that. Offsetting this, it had CN¥21.9b in cash and CN¥6.82b in receivables that were due within 12 months. So it can boast CN¥17.4b more liquid assets than total liabilities.

This excess liquidity suggests that Qinghai Salt Lake IndustryLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Qinghai Salt Lake IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Qinghai Salt Lake IndustryLtd if management cannot prevent a repeat of the 58% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Qinghai Salt Lake IndustryLtd 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. Qinghai Salt Lake IndustryLtd 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. Over the last three years, Qinghai Salt Lake IndustryLtd recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qinghai Salt Lake IndustryLtd has CN¥17.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥11b, being 84% of its EBIT. So is Qinghai Salt Lake IndustryLtd's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for Qinghai Salt Lake IndustryLtd 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.

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