The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Red Avenue New Materials Group Co., Ltd. (SHSE:603650) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Red Avenue New Materials Group
What Is Red Avenue New Materials Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Red Avenue New Materials Group had CN¥2.49b of debt, an increase on CN¥2.24b, over one year. However, it does have CN¥814.8m in cash offsetting this, leading to net debt of about CN¥1.67b.
SHSE:603650 Debt to Equity History September 25th 2022
A Look At Red Avenue New Materials Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Red Avenue New Materials Group had liabilities of CN¥2.06b due within 12 months and liabilities of CN¥1.64b due beyond that. Offsetting these obligations, it had cash of CN¥814.8m as well as receivables valued at CN¥1.09b due within 12 months. So its liabilities total CN¥1.80b more than the combination of its cash and short-term receivables.
Given Red Avenue New Materials Group has a market capitalization of CN¥17.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
As it happens Red Avenue New Materials Group has a fairly concerning net debt to EBITDA ratio of 7.6 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Shareholders should be aware that Red Avenue New Materials Group's EBIT was down 69% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Red Avenue New Materials Group 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Considering the last three years, Red Avenue New Materials Group actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Our View
On the face of it, Red Avenue New Materials Group's net debt to EBITDA left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Red Avenue New Materials Group's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for Red Avenue New Materials Group (of which 1 is a bit concerning!) 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.
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.
伯克希尔哈撒韦的外部基金经理理想汽车·卢直言不讳地说,最大的投资风险不是价格的波动,而是你是否会遭受永久性的资本损失。因此,当你考虑到任何一只股票的风险有多大时,你需要考虑债务可能是显而易见的,因为太多的债务可能会让一家公司倒闭。我们可以看到红大道新材料集团有限公司。(上海证券交易所:603650)确实在其业务中使用债务。但更重要的问题是:这笔债务造成了多大的风险?
什么时候债务是个问题?
一般来说,只有当一家公司无法轻松偿还债务时,债务才会成为一个真正的问题,无论是通过筹集资金还是用自己的现金流。如果情况真的变得很糟糕,贷款人可以控制业务。尽管这并不常见,但我们确实经常看到负债累累的公司永久性地稀释股东的权益,因为贷款人迫使他们以令人沮丧的价格筹集资金。当然,债务的好处是,它往往代表着廉价资本,特别是当它用能够以高回报率进行再投资的能力取代公司的稀释时。在考虑一家公司的债务水平时,第一步是同时考虑其现金和债务。
查看我们对红大道新材料集团的最新分析
红大道新材料集团的债务是什么?
你可以点击下图查看历史数字,但它显示了截至2022年6月,红大道新材料集团的债务为24.9亿元人民币,比一年前增加了22.4亿元人民币。然而,它确实有8.148亿加元的现金来抵消这一点,导致净债务约为16.7亿加元。
上证综指:603650债转股历史2022年9月25日
看红大道新材料集团的负债情况
放大最新的资产负债表数据可以看到,红大道新材集团有20.6亿元的负债在12个月内到期,超过12个月的负债有16.4亿元的负债到期。为了抵消这些债务,该公司有8.148亿加元的现金以及价值10.9亿加元的应收账款在12个月内到期。因此,其负债总额为人民币18.亿元,比现金和短期应收账款的总和还要多。
鉴于红大道新材料集团的市值为170亿元人民币,很难相信这些债务会构成太大威胁。然而,我们确实认为值得关注其资产负债表的实力,因为它可能会随着时间的推移而变化。
我们使用两个主要比率来告知我们债务相对于收益的水平。第一个是净债务除以利息、税项、折旧和摊销前收益(EBITDA),第二个是其息税前收益(EBIT)覆盖其利息支出(或简称利息覆盖)的多少倍。因此,我们考虑债务相对于收益,包括折旧和摊销费用。
碰巧的是,红大道新材料集团的净债务与EBITDA之比相当令人担忧,为7.6,但利息覆盖率非常高,为1k。因此,要么它可以获得非常便宜的长期债务,要么利息支出将会增长!股东们应该知道,红大道新材料集团的息税前利润去年下降了69%。如果这种盈利趋势持续下去,那么偿还债务就像把猫赶上过山车一样容易。毫无疑问,我们从资产负债表中了解到的债务最多。但最终,该业务未来的盈利能力将决定红大道新材料集团能否随着时间的推移加强其资产负债表。所以,如果你关注未来,你可以看看这个免费显示分析师利润预测的报告。
最后,企业需要自由现金流来偿还债务;会计利润只是不能削减这一点。因此,合乎逻辑的一步是看看息税前利润与实际自由现金流相匹配的比例。考虑到过去三年,红大道新材料集团实际上整体上录得了现金流出。对于自由现金流不可靠的公司来说,债务的风险要大得多,因此股东们应该希望过去的支出能在未来产生自由现金流。
我们的观点
从表面上看,红大道新材料集团对EBITDA的净债务让我们对该股持怀疑态度,其EBIT增长率并不比一年中最繁忙的夜晚的一家空餐厅更具诱惑力。但从好的方面来看,它的利息覆盖是一个好兆头,让我们更加乐观。一旦我们考虑到以上所有因素,在我们看来,红大道新材料集团的债务似乎让它变得有点风险。有些人喜欢这种风险,但我们注意到了潜在的陷阱,所以我们可能更喜欢它背负更少的债务。毫无疑问,我们从资产负债表中了解到的债务最多。但归根结底,每家公司都可能包含存在于资产负债表之外的风险。这些风险可能很难发现。每家公司都有它们,我们已经发现红大道新材料集团的3个警告标志(其中1个有点令人担忧!)你应该知道。
如果你有兴趣投资于可以在没有债务负担的情况下增长利润的企业,那么看看这个免费资产负债表上有净现金的成长型企业名单。
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本文由Simply Wall St.撰写,具有概括性。我们仅使用不偏不倚的方法提供基于历史数据和分析师预测的评论,我们的文章并不打算作为财务建议。它不构成买卖任何股票的建议,也没有考虑你的目标或你的财务状况。我们的目标是为您带来由基本面数据驱动的长期重点分析。请注意,我们的分析可能不会将最新的对价格敏感的公司公告或定性材料考虑在内。Simply Wall St.对上述任何一只股票都没有持仓。