Does SF DiamondLtd (SZSE:300179) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 SF Diamond Co.,Ltd (SZSE:300179) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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 SF DiamondLtd

What Is SF DiamondLtd's Net Debt?

As you can see below, at the end of September 2024, SF DiamondLtd had CN¥48.5m of debt, up from CN¥42.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥409.1m in cash, so it actually has CN¥360.6m net cash.

How Healthy Is SF DiamondLtd's Balance Sheet?

According to the last reported balance sheet, SF DiamondLtd had liabilities of CN¥313.2m due within 12 months, and liabilities of CN¥132.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥409.1m as well as receivables valued at CN¥268.7m due within 12 months. So it actually has CN¥232.5m more liquid assets than total liabilities.

This surplus suggests that SF DiamondLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SF DiamondLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for SF DiamondLtd if management cannot prevent a repeat of the 22% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is SF DiamondLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SF DiamondLtd 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. During the last three years, SF DiamondLtd burned a lot of cash. 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 SF DiamondLtd has CN¥360.6m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about SF DiamondLtd's balance sheet. 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. We've identified 3 warning signs with SF DiamondLtd (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.