Here's Why Jiangsu Boqian New Materials Stock (SHSE:605376) Can Afford Some 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.' 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, Jiangsu Boqian New Materials Stock Co., Ltd. (SHSE:605376) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jiangsu Boqian New Materials Stock

How Much Debt Does Jiangsu Boqian New Materials Stock Carry?

The image below, which you can click on for greater detail, shows that Jiangsu Boqian New Materials Stock had debt of CN¥194.9m at the end of March 2024, a reduction from CN¥219.7m over a year. However, it also had CN¥103.1m in cash, and so its net debt is CN¥91.8m.

How Strong Is Jiangsu Boqian New Materials Stock's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Boqian New Materials Stock had liabilities of CN¥314.2m due within 12 months and liabilities of CN¥42.8m due beyond that. On the other hand, it had cash of CN¥103.1m and CN¥258.5m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Jiangsu Boqian New Materials Stock's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.74b company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Boqian New Materials Stock can strengthen its balance sheet over time. 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 Jiangsu Boqian New Materials Stock wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥764m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Jiangsu Boqian New Materials Stock's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥32m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. For example, we've discovered 2 warning signs for Jiangsu Boqian New Materials Stock (1 is potentially serious!) that you should be aware of before investing here.

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.