Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Snowsky Salt Industry Group CO.,LTD (SHSE:600929) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Snowsky Salt Industry GroupLTD's Debt?

The image below, which you can click on for greater detail, shows that Snowsky Salt Industry GroupLTD had debt of CN¥160.9m at the end of March 2024, a reduction from CN¥562.4m over a year. However, it does have CN¥2.27b in cash offsetting this, leading to net cash of CN¥2.10b.

How Strong Is Snowsky Salt Industry GroupLTD's Balance Sheet?

We can see from the most recent balance sheet that Snowsky Salt Industry GroupLTD had liabilities of CN¥2.79b falling due within a year, and liabilities of CN¥302.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.27b as well as receivables valued at CN¥1.38b due within 12 months. So it can boast CN¥550.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Snowsky Salt Industry GroupLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Snowsky Salt Industry GroupLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Snowsky Salt Industry GroupLTD if management cannot prevent a repeat of the 34% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Snowsky Salt Industry GroupLTD 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Snowsky Salt Industry GroupLTD 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, Snowsky Salt Industry GroupLTD's free cash flow amounted to 24% 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 investigate a company's debt, in this case Snowsky Salt Industry GroupLTD has CN¥2.10b in net cash and a decent-looking balance sheet. So we are not troubled with Snowsky Salt Industry GroupLTD's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Snowsky Salt Industry GroupLTD you should know about.

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.