Jiangxi Hungpai New Material (SHSE:605366) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jiangxi Hungpai New Material Co., Ltd. (SHSE:605366) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangxi Hungpai New Material

How Much Debt Does Jiangxi Hungpai New Material Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangxi Hungpai New Material had debt of CN¥1.61b, up from CN¥813.1m in one year. On the flip side, it has CN¥1.44b in cash leading to net debt of about CN¥162.7m.

How Healthy Is Jiangxi Hungpai New Material's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangxi Hungpai New Material had liabilities of CN¥487.3m due within 12 months and liabilities of CN¥1.51b due beyond that. Offsetting this, it had CN¥1.44b in cash and CN¥357.7m in receivables that were due within 12 months. So its liabilities total CN¥194.3m more than the combination of its cash and short-term receivables.

Of course, Jiangxi Hungpai New Material has a market capitalization of CN¥3.88b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangxi Hungpai New Material'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.

In the last year Jiangxi Hungpai New Material wasn't profitable at an EBIT level, but managed to grow its revenue by 3.4%, to CN¥1.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Jiangxi Hungpai New Material produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥5.9m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥651k. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Jiangxi Hungpai New Material you should be aware of, and 1 of them doesn't sit too well with us.

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.