Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Yunnan Shennong Agricultural Industry Group Co.,LTD. (SHSE:605296) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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.

How Much Debt Does Yunnan Shennong Agricultural Industry GroupLTD Carry?

As you can see below, at the end of September 2024, Yunnan Shennong Agricultural Industry GroupLTD had CN¥618.2m of debt, up from CN¥459.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥951.7m in cash, leading to a CN¥333.5m net cash position.

A Look At Yunnan Shennong Agricultural Industry GroupLTD's Liabilities

We can see from the most recent balance sheet that Yunnan Shennong Agricultural Industry GroupLTD had liabilities of CN¥1.35b falling due within a year, and liabilities of CN¥451.2m due beyond that. On the other hand, it had cash of CN¥951.7m and CN¥192.2m worth of receivables due within a year. So its liabilities total CN¥661.9m more than the combination of its cash and short-term receivables.

Given Yunnan Shennong Agricultural Industry GroupLTD has a market capitalization of CN¥15.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yunnan Shennong Agricultural Industry GroupLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Yunnan Shennong Agricultural Industry GroupLTD grew its EBIT by 127% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Yunnan Shennong Agricultural Industry GroupLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Yunnan Shennong Agricultural 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. Over the last two years, Yunnan Shennong Agricultural Industry GroupLTD saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Yunnan Shennong Agricultural Industry GroupLTD's liabilities, but we can be reassured by the fact it has has net cash of CN¥333.5m. And we liked the look of last year's 127% year-on-year EBIT growth. So we don't have any problem with Yunnan Shennong Agricultural Industry GroupLTD's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Yunnan Shennong Agricultural Industry GroupLTD .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.