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 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 Nantong Jiangshan Agrochemical & Chemicals Co.,Ltd. (SHSE:600389) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Nantong Jiangshan Agrochemical & ChemicalsLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Nantong Jiangshan Agrochemical & ChemicalsLtd had debt of CN¥984.2m, up from CN¥773.0m in one year. However, it does have CN¥2.19b in cash offsetting this, leading to net cash of CN¥1.21b.

How Healthy Is Nantong Jiangshan Agrochemical & ChemicalsLtd's Balance Sheet?

The latest balance sheet data shows that Nantong Jiangshan Agrochemical & ChemicalsLtd had liabilities of CN¥2.11b due within a year, and liabilities of CN¥927.6m falling due after that. Offsetting these obligations, it had cash of CN¥2.19b as well as receivables valued at CN¥554.8m due within 12 months. So it has liabilities totalling CN¥284.9m more than its cash and near-term receivables, combined.

Of course, Nantong Jiangshan Agrochemical & ChemicalsLtd has a market capitalization of CN¥5.94b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Nantong Jiangshan Agrochemical & ChemicalsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Nantong Jiangshan Agrochemical & ChemicalsLtd's saving grace is its low debt levels, because its EBIT has tanked 82% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nantong Jiangshan Agrochemical & ChemicalsLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Nantong Jiangshan Agrochemical & ChemicalsLtd 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, Nantong Jiangshan Agrochemical & ChemicalsLtd produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Nantong Jiangshan Agrochemical & ChemicalsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.21b. And it impressed us with free cash flow of -CN¥80m, being 78% of its EBIT. So we are not troubled with Nantong Jiangshan Agrochemical & ChemicalsLtd'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. For example - Nantong Jiangshan Agrochemical & ChemicalsLtd has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.