GuangDong SongYang Recycle ResourcesLTD (SHSE:603863) Is Carrying A Fair Bit Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that GuangDong SongYang Recycle Resources CO.,LTD (SHSE:603863) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for GuangDong SongYang Recycle ResourcesLTD

What Is GuangDong SongYang Recycle ResourcesLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 GuangDong SongYang Recycle ResourcesLTD had CN¥528.3m of debt, an increase on CN¥496.3m, over one year. On the flip side, it has CN¥24.8m in cash leading to net debt of about CN¥503.5m.

How Strong Is GuangDong SongYang Recycle ResourcesLTD's Balance Sheet?

According to the last reported balance sheet, GuangDong SongYang Recycle ResourcesLTD had liabilities of CN¥632.8m due within 12 months, and liabilities of CN¥151.2m due beyond 12 months. On the other hand, it had cash of CN¥24.8m and CN¥36.5m worth of receivables due within a year. So its liabilities total CN¥722.6m more than the combination of its cash and short-term receivables.

Given GuangDong SongYang Recycle ResourcesLTD has a market capitalization of CN¥5.21b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GuangDong SongYang Recycle ResourcesLTD will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, GuangDong SongYang Recycle ResourcesLTD made a loss at the EBIT level, and saw its revenue drop to CN¥718m, which is a fall of 3.3%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months GuangDong SongYang Recycle ResourcesLTD produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥165m. 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. However, it doesn't help that it burned through CN¥94m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for GuangDong SongYang Recycle ResourcesLTD you should know about.

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.

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.