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. We note that Jiangsu Sanfame Polyester Material Co.,Ltd. (SHSE:600370) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiangsu Sanfame Polyester MaterialLtd Carry?

As you can see below, at the end of September 2024, Jiangsu Sanfame Polyester MaterialLtd had CN¥7.73b of debt, up from CN¥5.76b a year ago. Click the image for more detail. However, it does have CN¥1.16b in cash offsetting this, leading to net debt of about CN¥6.57b.

How Healthy Is Jiangsu Sanfame Polyester MaterialLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Sanfame Polyester MaterialLtd had liabilities of CN¥7.60b due within 12 months and liabilities of CN¥4.90b due beyond that. Offsetting these obligations, it had cash of CN¥1.16b as well as receivables valued at CN¥4.32b due within 12 months. So its liabilities total CN¥7.01b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥6.81b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. 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.

Check out our latest analysis for Jiangsu Sanfame Polyester MaterialLtd

In the last year Jiangsu Sanfame Polyester MaterialLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

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. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥3.3b over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Jiangsu Sanfame Polyester MaterialLtd , 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.