David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Nonghua Intelligent Agriculture Technology Co.ltd (SZSE:000816) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Jiangsu Nonghua Intelligent Agriculture Technologyltd Carry?
The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu Nonghua Intelligent Agriculture Technologyltd had debt of CN¥95.8m, up from CN¥49.3m in one year. However, its balance sheet shows it holds CN¥652.7m in cash, so it actually has CN¥556.9m net cash.
How Strong Is Jiangsu Nonghua Intelligent Agriculture Technologyltd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangsu Nonghua Intelligent Agriculture Technologyltd had liabilities of CN¥983.8m due within 12 months and liabilities of CN¥124.6m due beyond that. Offsetting these obligations, it had cash of CN¥652.7m as well as receivables valued at CN¥276.8m due within 12 months. So its liabilities total CN¥178.9m more than the combination of its cash and short-term receivables.
Of course, Jiangsu Nonghua Intelligent Agriculture Technologyltd has a market capitalization of CN¥4.18b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jiangsu Nonghua Intelligent Agriculture Technologyltd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangsu Nonghua Intelligent Agriculture Technologyltd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Jiangsu Nonghua Intelligent Agriculture Technologyltd had a loss before interest and tax, and actually shrunk its revenue by 4.0%, to CN¥1.3b. We would much prefer see growth.
So How Risky Is Jiangsu Nonghua Intelligent Agriculture Technologyltd?
Although Jiangsu Nonghua Intelligent Agriculture Technologyltd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥55m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Jiangsu Nonghua Intelligent Agriculture Technologyltd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.