Warren Buffett famously said, '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, Anhui Shenjian New Materials Co.,Ltd (SZSE:002361) does carry debt. But should shareholders be worried about its use of debt?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Anhui Shenjian New MaterialsLtd
What Is Anhui Shenjian New MaterialsLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Anhui Shenjian New MaterialsLtd had CN¥1.46b of debt, an increase on CN¥1.32b, over one year. However, because it has a cash reserve of CN¥656.4m, its net debt is less, at about CN¥801.9m.
How Healthy Is Anhui Shenjian New MaterialsLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Anhui Shenjian New MaterialsLtd had liabilities of CN¥2.02b due within 12 months and liabilities of CN¥129.4m due beyond that. Offsetting these obligations, it had cash of CN¥656.4m as well as receivables valued at CN¥1.60b due within 12 months. So it can boast CN¥111.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Anhui Shenjian New MaterialsLtd 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 Anhui Shenjian New MaterialsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Anhui Shenjian New MaterialsLtd had a loss before interest and tax, and actually shrunk its revenue by 5.0%, to CN¥2.5b. We would much prefer see growth.
Caveat Emptor
Importantly, Anhui Shenjian New MaterialsLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥24m. 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Anhui Shenjian New MaterialsLtd (of which 2 make us uncomfortable!) 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.
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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.