Is North Huajin Chemical IndustriesLtd (SZSE:000059) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that North Huajin Chemical Industries Co.,Ltd (SZSE:000059) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 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 North Huajin Chemical IndustriesLtd

What Is North Huajin Chemical IndustriesLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that North Huajin Chemical IndustriesLtd had CN¥10.1b of debt in September 2024, down from CN¥11.1b, one year before. However, it does have CN¥4.90b in cash offsetting this, leading to net debt of about CN¥5.22b.

A Look At North Huajin Chemical IndustriesLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that North Huajin Chemical IndustriesLtd had liabilities of CN¥6.10b due within 12 months and liabilities of CN¥8.10b due beyond that. On the other hand, it had cash of CN¥4.90b and CN¥212.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.09b.

When you consider that this deficiency exceeds the company's CN¥7.93b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if North Huajin Chemical IndustriesLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, North Huajin Chemical IndustriesLtd made a loss at the EBIT level, and saw its revenue drop to CN¥38b, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did North Huajin Chemical IndustriesLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.1b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥359m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. Case in point: We've spotted 1 warning sign for North Huajin Chemical IndustriesLtd you should be aware of.

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.