Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Huafon Microfibre (Shanghai) Co., Ltd. (SZSE:300180) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Huafon Microfibre (Shanghai)
What Is Huafon Microfibre (Shanghai)'s Net Debt?
The image below, which you can click on for greater detail, shows that Huafon Microfibre (Shanghai) had debt of CN¥1.58b at the end of September 2023, a reduction from CN¥1.82b over a year. However, because it has a cash reserve of CN¥372.0m, its net debt is less, at about CN¥1.21b.
How Healthy Is Huafon Microfibre (Shanghai)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Huafon Microfibre (Shanghai) had liabilities of CN¥2.41b due within 12 months and liabilities of CN¥777.4m due beyond that. On the other hand, it had cash of CN¥372.0m and CN¥1.31b worth of receivables due within a year. So it has liabilities totalling CN¥1.51b more than its cash and near-term receivables, combined.
Of course, Huafon Microfibre (Shanghai) has a market capitalization of CN¥8.15b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Huafon Microfibre (Shanghai) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Huafon Microfibre (Shanghai) made a loss at the EBIT level, and saw its revenue drop to CN¥4.2b, which is a fall of 2.4%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Huafon Microfibre (Shanghai) produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥52m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥13m of cash over the last year. So to be blunt we think it 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. For instance, we've identified 2 warning signs for Huafon Microfibre (Shanghai) that you should be aware of.
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.