Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Jiangsu Huifeng Bio Agriculture Co., Ltd. (SZSE:002496) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Jiangsu Huifeng Bio Agriculture's Debt?
As you can see below, Jiangsu Huifeng Bio Agriculture had CN¥333.4m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥51.4m in cash offsetting this, leading to net debt of about CN¥282.0m.
How Strong Is Jiangsu Huifeng Bio Agriculture's Balance Sheet?
The latest balance sheet data shows that Jiangsu Huifeng Bio Agriculture had liabilities of CN¥920.6m due within a year, and liabilities of CN¥331.4m falling due after that. Offsetting these obligations, it had cash of CN¥51.4m as well as receivables valued at CN¥117.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.08b.
While this might seem like a lot, it is not so bad since Jiangsu Huifeng Bio Agriculture has a market capitalization of CN¥4.19b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Huifeng Bio Agriculture will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Jiangsu Huifeng Bio Agriculture made a loss at the EBIT level, and saw its revenue drop to CN¥226m, which is a fall of 15%. We would much prefer see growth.
Caveat Emptor
Not only did Jiangsu Huifeng Bio Agriculture's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥67m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥59m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangsu Huifeng Bio Agriculture you should know about.
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.