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 can see that Jiangsu Yangnong Chemical Co., Ltd. (SHSE:600486) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiangsu Yangnong Chemical Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Yangnong Chemical had debt of CN¥941.5m, up from CN¥813.3m in one year. But on the other hand it also has CN¥3.04b in cash, leading to a CN¥2.10b net cash position.

How Healthy Is Jiangsu Yangnong Chemical's Balance Sheet?

According to the last reported balance sheet, Jiangsu Yangnong Chemical had liabilities of CN¥6.69b due within 12 months, and liabilities of CN¥284.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.04b as well as receivables valued at CN¥3.75b due within 12 months. So it has liabilities totalling CN¥181.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that Jiangsu Yangnong Chemical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥24.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Jiangsu Yangnong Chemical 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 Jiangsu Yangnong Chemical if management cannot prevent a repeat of the 32% 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 it is future earnings, more than anything, that will determine Jiangsu Yangnong Chemical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Yangnong Chemical 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. In the last three years, Jiangsu Yangnong Chemical's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiangsu Yangnong Chemical has CN¥2.10b in net cash. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Jiangsu Yangnong Chemical .

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.

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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.