Does Jiangsu HSC New Energy MaterialsLTD (SHSE:688353) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Jiangsu HSC New Energy Materials Co.,LTD. (SHSE:688353) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu HSC New Energy MaterialsLTD

How Much Debt Does Jiangsu HSC New Energy MaterialsLTD Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu HSC New Energy MaterialsLTD had debt of CN¥162.9m, up from CN¥116.4m in one year. However, its balance sheet shows it holds CN¥1.91b in cash, so it actually has CN¥1.74b net cash.

A Look At Jiangsu HSC New Energy MaterialsLTD's Liabilities

The latest balance sheet data shows that Jiangsu HSC New Energy MaterialsLTD had liabilities of CN¥343.2m due within a year, and liabilities of CN¥213.2m falling due after that. On the other hand, it had cash of CN¥1.91b and CN¥272.2m worth of receivables due within a year. So it actually has CN¥1.62b more liquid assets than total liabilities.

This excess liquidity is a great indication that Jiangsu HSC New Energy MaterialsLTD's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Jiangsu HSC New Energy MaterialsLTD boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Jiangsu HSC New Energy MaterialsLTD's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jiangsu HSC New Energy MaterialsLTD made a loss at the EBIT level, and saw its revenue drop to CN¥460m, which is a fall of 17%. We would much prefer see growth.

So How Risky Is Jiangsu HSC New Energy MaterialsLTD?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Jiangsu HSC New Energy MaterialsLTD lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥432m of cash and made a loss of CN¥181m. Given it only has net cash of CN¥1.74b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Jiangsu HSC New Energy MaterialsLTD , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.