Does Shida Shinghwa Advanced Material Group (SHSE:603026) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Shida Shinghwa Advanced Material Group Co., Ltd. (SHSE:603026) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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 Shida Shinghwa Advanced Material Group

What Is Shida Shinghwa Advanced Material Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shida Shinghwa Advanced Material Group had CN¥2.17b of debt, an increase on CN¥728.6m, over one year. On the flip side, it has CN¥1.38b in cash leading to net debt of about CN¥795.9m.

A Look At Shida Shinghwa Advanced Material Group's Liabilities

The latest balance sheet data shows that Shida Shinghwa Advanced Material Group had liabilities of CN¥2.16b due within a year, and liabilities of CN¥1.80b falling due after that. Offsetting these obligations, it had cash of CN¥1.38b as well as receivables valued at CN¥976.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.61b.

This deficit isn't so bad because Shida Shinghwa Advanced Material Group is worth CN¥7.88b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shida Shinghwa Advanced Material Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shida Shinghwa Advanced Material Group made a loss at the EBIT level, and saw its revenue drop to CN¥5.4b, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

While Shida Shinghwa Advanced Material Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥51m 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. However, it doesn't help that it burned through CN¥1.1b of cash over the last year. So in short it's a really risky stock. 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 2 warning signs for Shida Shinghwa Advanced Material Group you should be aware of, and 1 of them doesn't sit too well with us.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.