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 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 note that Zhuhai CosMX Battery Co., Ltd. (SHSE:688772) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
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How Much Debt Does Zhuhai CosMX Battery Carry?
The image below, which you can click on for greater detail, shows that at September 2024 Zhuhai CosMX Battery had debt of CN¥7.12b, up from CN¥6.63b in one year. On the flip side, it has CN¥4.25b in cash leading to net debt of about CN¥2.87b.
A Look At Zhuhai CosMX Battery's Liabilities
The latest balance sheet data shows that Zhuhai CosMX Battery had liabilities of CN¥9.03b due within a year, and liabilities of CN¥5.73b falling due after that. On the other hand, it had cash of CN¥4.25b and CN¥3.33b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.18b.
While this might seem like a lot, it is not so bad since Zhuhai CosMX Battery has a market capitalization of CN¥19.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhuhai CosMX Battery'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 Zhuhai CosMX Battery wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to CN¥11b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Zhuhai CosMX Battery produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥146m. 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. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥59m and the profit of CN¥323m. So one might argue that there's still a chance it can get things on the right track. 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. For instance, we've identified 3 warning signs for Zhuhai CosMX Battery (1 shouldn't be ignored) you should be aware of.
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.
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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.
About SHSE:688772
Zhuhai CosMX Battery
Manufactures and supplies polymer lithium-ion batteries worldwide.
Good value with reasonable growth potential.