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.' 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. We can see that Keshun Waterproof Technolgies Co.,Ltd. (SZSE:300737) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Keshun Waterproof TechnolgiesLtd
What Is Keshun Waterproof TechnolgiesLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Keshun Waterproof TechnolgiesLtd had debt of CN¥3.30b, up from CN¥2.10b in one year. However, it also had CN¥2.26b in cash, and so its net debt is CN¥1.03b.
A Look At Keshun Waterproof TechnolgiesLtd's Liabilities
We can see from the most recent balance sheet that Keshun Waterproof TechnolgiesLtd had liabilities of CN¥7.36b falling due within a year, and liabilities of CN¥822.0m due beyond that. On the other hand, it had cash of CN¥2.26b and CN¥6.77b worth of receivables due within a year. So it can boast CN¥855.7m more liquid assets than total liabilities.
This surplus suggests that Keshun Waterproof TechnolgiesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 Keshun Waterproof TechnolgiesLtd 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.
Over 12 months, Keshun Waterproof TechnolgiesLtd made a loss at the EBIT level, and saw its revenue drop to CN¥7.9b, which is a fall of 3.6%. We would much prefer see growth.
Caveat Emptor
Importantly, Keshun Waterproof TechnolgiesLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥20m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Keshun Waterproof TechnolgiesLtd that you should be aware of.
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.