Is Jiangsu Sanfame Polyester MaterialLtd (SHSE:600370) Using Debt In A Risky Way?

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.' 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. Importantly, Jiangsu Sanfame Polyester Material Co.,Ltd. (SHSE:600370) does carry debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Jiangsu Sanfame Polyester MaterialLtd

How Much Debt Does Jiangsu Sanfame Polyester MaterialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Sanfame Polyester MaterialLtd had CN¥7.73b of debt, an increase on CN¥5.76b, over one year. However, it also had CN¥1.16b in cash, and so its net debt is CN¥6.57b.

A Look At Jiangsu Sanfame Polyester MaterialLtd's Liabilities

The latest balance sheet data shows that Jiangsu Sanfame Polyester MaterialLtd had liabilities of CN¥7.60b due within a year, and liabilities of CN¥4.90b falling due after that. Offsetting this, it had CN¥1.16b in cash and CN¥4.32b in receivables that were due within 12 months. So its liabilities total CN¥7.01b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥8.19b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Sanfame Polyester MaterialLtd 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, Jiangsu Sanfame Polyester MaterialLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Jiangsu Sanfame Polyester MaterialLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥471m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥3.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Jiangsu Sanfame Polyester MaterialLtd .

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.