Here's Why Hunan Boyun New MaterialsLtd (SZSE:002297) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Hunan Boyun New Materials Co.,Ltd (SZSE:002297) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 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 Hunan Boyun New MaterialsLtd

How Much Debt Does Hunan Boyun New MaterialsLtd Carry?

As you can see below, at the end of March 2024, Hunan Boyun New MaterialsLtd had CN¥250.0m of debt, up from CN¥148.1m a year ago. Click the image for more detail. But it also has CN¥533.6m in cash to offset that, meaning it has CN¥283.6m net cash.

How Strong Is Hunan Boyun New MaterialsLtd's Balance Sheet?

The latest balance sheet data shows that Hunan Boyun New MaterialsLtd had liabilities of CN¥623.0m due within a year, and liabilities of CN¥117.2m falling due after that. Offsetting these obligations, it had cash of CN¥533.6m as well as receivables valued at CN¥348.5m due within 12 months. So it can boast CN¥142.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Hunan Boyun New MaterialsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hunan Boyun New MaterialsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Hunan Boyun New MaterialsLtd's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hunan Boyun New MaterialsLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hunan Boyun New MaterialsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Hunan Boyun New MaterialsLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hunan Boyun New MaterialsLtd has CN¥283.6m in net cash and a decent-looking balance sheet. So while Hunan Boyun New MaterialsLtd does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 1 warning sign for Hunan Boyun New MaterialsLtd 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.