Is Kangxin New Materials (SHSE:600076) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Kangxin New Materials Co., Ltd (SHSE:600076) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 Kangxin New Materials

What Is Kangxin New Materials's Net Debt?

As you can see below, Kangxin New Materials had CN¥2.39b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥138.5m in cash, and so its net debt is CN¥2.25b.

How Strong Is Kangxin New Materials' Balance Sheet?

The latest balance sheet data shows that Kangxin New Materials had liabilities of CN¥1.75b due within a year, and liabilities of CN¥830.3m falling due after that. Offsetting this, it had CN¥138.5m in cash and CN¥168.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.27b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Kangxin New Materials has a market capitalization of CN¥3.84b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kangxin New Materials's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kangxin New Materials reported revenue of CN¥640m, which is a gain of 193%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Kangxin New Materials still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥196m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥290m into a profit. So we do think this stock is quite 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. Case in point: We've spotted 2 warning signs for Kangxin New Materials 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.