Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Keshun Waterproof Technolgies Co.,Ltd. (SZSE:300737) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Keshun Waterproof TechnolgiesLtd
How Much Debt Does Keshun Waterproof TechnolgiesLtd Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Keshun Waterproof TechnolgiesLtd had CN¥4.63b of debt, an increase on CN¥2.19b, over one year. However, it does have CN¥2.98b in cash offsetting this, leading to net debt of about CN¥1.65b.
How Healthy Is Keshun Waterproof TechnolgiesLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Keshun Waterproof TechnolgiesLtd had liabilities of CN¥6.32b due within 12 months and liabilities of CN¥2.82b due beyond that. Offsetting these obligations, it had cash of CN¥2.98b as well as receivables valued at CN¥6.45b due within 12 months. So it can boast CN¥286.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Keshun Waterproof TechnolgiesLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Keshun Waterproof TechnolgiesLtd'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.
In the last year Keshun Waterproof TechnolgiesLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Over the last twelve months Keshun Waterproof TechnolgiesLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥34m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. We've identified 1 warning sign with Keshun Waterproof TechnolgiesLtd , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.