We Think Grace Fabric TechnologyLtd (SHSE:603256) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Grace Fabric Technology Co.,Ltd. (SHSE:603256) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Grace Fabric TechnologyLtd

How Much Debt Does Grace Fabric TechnologyLtd Carry?

As you can see below, at the end of March 2024, Grace Fabric TechnologyLtd had CN¥950.5m of debt, up from CN¥765.7m a year ago. Click the image for more detail. On the flip side, it has CN¥243.3m in cash leading to net debt of about CN¥707.2m.

A Look At Grace Fabric TechnologyLtd's Liabilities

According to the last reported balance sheet, Grace Fabric TechnologyLtd had liabilities of CN¥602.8m due within 12 months, and liabilities of CN¥541.4m due beyond 12 months. Offsetting this, it had CN¥243.3m in cash and CN¥392.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥508.8m more than its cash and near-term receivables, combined.

Of course, Grace Fabric TechnologyLtd has a market capitalization of CN¥5.66b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Grace Fabric TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Grace Fabric TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to CN¥729m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Grace Fabric TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥56m 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¥193m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 2 warning signs for Grace Fabric TechnologyLtd you should be aware of, and 1 of them is a bit concerning.

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.

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