We Think Guangzhou Sanfu New Materials TechnologyLtd (SHSE:688359) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Guangzhou Sanfu New Materials Technology Co.,Ltd (SHSE:688359) does carry debt. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Guangzhou Sanfu New Materials TechnologyLtd

How Much Debt Does Guangzhou Sanfu New Materials TechnologyLtd Carry?

As you can see below, at the end of September 2024, Guangzhou Sanfu New Materials TechnologyLtd had CN¥307.1m of debt, up from CN¥234.1m a year ago. Click the image for more detail. On the flip side, it has CN¥76.7m in cash leading to net debt of about CN¥230.4m.

A Look At Guangzhou Sanfu New Materials TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangzhou Sanfu New Materials TechnologyLtd had liabilities of CN¥513.6m due within 12 months and liabilities of CN¥152.0m due beyond that. On the other hand, it had cash of CN¥76.7m and CN¥424.8m worth of receivables due within a year. So its liabilities total CN¥164.2m more than the combination of its cash and short-term receivables.

Of course, Guangzhou Sanfu New Materials TechnologyLtd has a market capitalization of CN¥4.06b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangzhou Sanfu New Materials TechnologyLtd'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, Guangzhou Sanfu New Materials TechnologyLtd reported revenue of CN¥595m, which is a gain of 42%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Guangzhou Sanfu New Materials TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥3.5m. 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. Another cause for caution is that is bled CN¥95m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. For example - Guangzhou Sanfu New Materials TechnologyLtd has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.