Is Jiangxi Chenguang New Materials (SHSE:605399) Using Debt In A Risky Way?

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.' 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 Chenguang New Materials Company Limited (SHSE:605399) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangxi Chenguang New Materials

What Is Jiangxi Chenguang New Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangxi Chenguang New Materials had CN¥366.5m of debt, an increase on none, over one year. But on the other hand it also has CN¥1.19b in cash, leading to a CN¥818.9m net cash position.

How Strong Is Jiangxi Chenguang New Materials' Balance Sheet?

The latest balance sheet data shows that Jiangxi Chenguang New Materials had liabilities of CN¥668.6m due within a year, and liabilities of CN¥415.4m falling due after that. On the other hand, it had cash of CN¥1.19b and CN¥340.1m worth of receivables due within a year. So it actually has CN¥441.6m more liquid assets than total liabilities.

This surplus suggests that Jiangxi Chenguang New Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangxi Chenguang New Materials has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Jiangxi Chenguang New Materials's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Jiangxi Chenguang New Materials made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 17%. That's not what we would hope to see.

So How Risky Is Jiangxi Chenguang New Materials?

While Jiangxi Chenguang New Materials lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥72m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangxi Chenguang New Materials (of which 1 shouldn't be ignored!) 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.