Does Zhongfu Shenying Carbon FiberLtd (SHSE:688295) Have A Healthy Balance Sheet?

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. Importantly, Zhongfu Shenying Carbon Fiber Co.,Ltd. (SHSE:688295) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhongfu Shenying Carbon FiberLtd

What Is Zhongfu Shenying Carbon FiberLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhongfu Shenying Carbon FiberLtd had debt of CN¥2.29b, up from CN¥2.07b in one year. However, because it has a cash reserve of CN¥1.87b, its net debt is less, at about CN¥427.3m.

How Healthy Is Zhongfu Shenying Carbon FiberLtd's Balance Sheet?

According to the last reported balance sheet, Zhongfu Shenying Carbon FiberLtd had liabilities of CN¥1.54b due within 12 months, and liabilities of CN¥2.92b due beyond 12 months. On the other hand, it had cash of CN¥1.87b and CN¥651.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.95b.

Given Zhongfu Shenying Carbon FiberLtd has a market capitalization of CN¥17.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhongfu Shenying Carbon FiberLtd 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 Zhongfu Shenying Carbon FiberLtd had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥1.8b. We would much prefer see growth.

Caveat Emptor

Not only did Zhongfu Shenying Carbon FiberLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥43m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥46m 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Zhongfu Shenying Carbon FiberLtd (including 1 which is concerning) .

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.