Does Shenzhen SunXing Light Alloys MaterialsLtd (SHSE:603978) Have A Healthy Balance Sheet?

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. We can see that Shenzhen SunXing Light Alloys Materials Co.,Ltd. (SHSE:603978) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen SunXing Light Alloys MaterialsLtd

How Much Debt Does Shenzhen SunXing Light Alloys MaterialsLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen SunXing Light Alloys MaterialsLtd had debt of CN¥1.80b, up from CN¥1.46b in one year. On the flip side, it has CN¥368.3m in cash leading to net debt of about CN¥1.43b.

How Strong Is Shenzhen SunXing Light Alloys MaterialsLtd's Balance Sheet?

According to the last reported balance sheet, Shenzhen SunXing Light Alloys MaterialsLtd had liabilities of CN¥1.74b due within 12 months, and liabilities of CN¥813.5m due beyond 12 months. Offsetting this, it had CN¥368.3m in cash and CN¥1.23b in receivables that were due within 12 months. So its liabilities total CN¥954.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Shenzhen SunXing Light Alloys MaterialsLtd has a market capitalization of CN¥3.78b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen SunXing Light Alloys MaterialsLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Shenzhen SunXing Light Alloys MaterialsLtd reported revenue of CN¥2.3b, which is a gain of 53%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Shenzhen SunXing Light Alloys MaterialsLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥70m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥512m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Shenzhen SunXing Light Alloys MaterialsLtd has 4 warning signs (and 2 which are potentially serious) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.