We Think Sichuan Crun (SZSE:002272) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Sichuan Crun Co., Ltd (SZSE:002272) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sichuan Crun

What Is Sichuan Crun's Debt?

As you can see below, at the end of September 2024, Sichuan Crun had CN¥977.5m of debt, up from CN¥886.1m a year ago. Click the image for more detail. However, it does have CN¥357.8m in cash offsetting this, leading to net debt of about CN¥619.6m.

How Healthy Is Sichuan Crun's Balance Sheet?

We can see from the most recent balance sheet that Sichuan Crun had liabilities of CN¥1.38b falling due within a year, and liabilities of CN¥556.1m due beyond that. Offsetting these obligations, it had cash of CN¥357.8m as well as receivables valued at CN¥1.38b due within 12 months. So it has liabilities totalling CN¥199.2m more than its cash and near-term receivables, combined.

Since publicly traded Sichuan Crun shares are worth a total of CN¥4.53b, it seems unlikely that this level of liabilities would be a major threat. 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 Sichuan Crun will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sichuan Crun had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥1.6b. We would much prefer see growth.

Caveat Emptor

Not only did Sichuan Crun's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥40m. 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¥105m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For example - Sichuan Crun has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.