Warren Buffett famously said, '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 note that Jiangsu Yangnong Chemical Co., Ltd. (SHSE:600486) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangsu Yangnong Chemical's Net Debt?

As you can see below, Jiangsu Yangnong Chemical had CN¥550.0m of debt at June 2024, down from CN¥807.3m a year prior. But on the other hand it also has CN¥4.30b in cash, leading to a CN¥3.75b net cash position.

A Look At Jiangsu Yangnong Chemical's Liabilities

We can see from the most recent balance sheet that Jiangsu Yangnong Chemical had liabilities of CN¥6.70b falling due within a year, and liabilities of CN¥281.5m due beyond that. Offsetting these obligations, it had cash of CN¥4.30b as well as receivables valued at CN¥3.56b due within 12 months. So it actually has CN¥872.4m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Yangnong Chemical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Yangnong Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jiangsu Yangnong Chemical's load is not too heavy, because its EBIT was down 26% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Jiangsu Yangnong Chemical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu Yangnong Chemical 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, Jiangsu Yangnong Chemical produced sturdy free cash flow equating to 68% 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 we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Yangnong Chemical has net cash of CN¥3.75b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥599m, being 68% of its EBIT. So we are not troubled with Jiangsu Yangnong Chemical's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Jiangsu Yangnong Chemical , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.