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. Importantly, Cofco Sugar Holding CO.,LTD. (SHSE:600737) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Cofco Sugar HoldingLTD Carry?

You can click the graphic below for the historical numbers, but it shows that Cofco Sugar HoldingLTD had CN¥2.62b of debt in September 2024, down from CN¥4.85b, one year before. On the flip side, it has CN¥2.46b in cash leading to net debt of about CN¥165.0m.

How Strong Is Cofco Sugar HoldingLTD's Balance Sheet?

The latest balance sheet data shows that Cofco Sugar HoldingLTD had liabilities of CN¥7.83b due within a year, and liabilities of CN¥272.9m falling due after that. On the other hand, it had cash of CN¥2.46b and CN¥3.04b worth of receivables due within a year. So its liabilities total CN¥2.61b more than the combination of its cash and short-term receivables.

Given Cofco Sugar HoldingLTD has a market capitalization of CN¥20.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Cofco Sugar HoldingLTD has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Cofco Sugar HoldingLTD has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.057 and EBIT of 21.3 times the interest expense. So relative to past earnings, the debt load seems trivial. In addition to that, we're happy to report that Cofco Sugar HoldingLTD has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. 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 Cofco Sugar HoldingLTD'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Cofco Sugar HoldingLTD created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Happily, Cofco Sugar HoldingLTD's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. When we consider the range of factors above, it looks like Cofco Sugar HoldingLTD is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cofco Sugar HoldingLTD is showing 1 warning sign in our investment analysis , 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.