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.' 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. Importantly, Sino-Agri Leading Biosciences Co.,Ltd (SHSE:603970) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sino-Agri Leading BiosciencesLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Sino-Agri Leading BiosciencesLtd had CN¥695.9m of debt in September 2024, down from CN¥1.11b, one year before. However, it does have CN¥860.1m in cash offsetting this, leading to net cash of CN¥164.2m.

How Healthy Is Sino-Agri Leading BiosciencesLtd's Balance Sheet?

According to the last reported balance sheet, Sino-Agri Leading BiosciencesLtd had liabilities of CN¥4.37b due within 12 months, and liabilities of CN¥19.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥860.1m as well as receivables valued at CN¥2.46b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.07b.

This deficit isn't so bad because Sino-Agri Leading BiosciencesLtd is worth CN¥3.91b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Sino-Agri Leading BiosciencesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Sino-Agri Leading BiosciencesLtd has increased its EBIT by 5.6% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sino-Agri Leading BiosciencesLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sino-Agri Leading BiosciencesLtd 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. Happily for any shareholders, Sino-Agri Leading BiosciencesLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Sino-Agri Leading BiosciencesLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥164.2m. And it impressed us with free cash flow of CN¥117m, being 154% of its EBIT. So we don't think Sino-Agri Leading BiosciencesLtd's use of debt is 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. To that end, you should be aware of the 1 warning sign we've spotted with Sino-Agri Leading BiosciencesLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.