Is Poly Union Chemical Holding Group (SZSE:002037) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Poly Union Chemical Holding Group Co., Ltd. (SZSE:002037) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Poly Union Chemical Holding Group

How Much Debt Does Poly Union Chemical Holding Group Carry?

As you can see below, Poly Union Chemical Holding Group had CN¥6.06b of debt at September 2024, down from CN¥7.26b a year prior. However, it does have CN¥1.37b in cash offsetting this, leading to net debt of about CN¥4.68b.

A Look At Poly Union Chemical Holding Group's Liabilities

According to the last reported balance sheet, Poly Union Chemical Holding Group had liabilities of CN¥11.0b due within 12 months, and liabilities of CN¥3.06b due beyond 12 months. Offsetting this, it had CN¥1.37b in cash and CN¥7.34b in receivables that were due within 12 months. So its liabilities total CN¥5.31b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥4.10b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Poly Union Chemical Holding Group'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.

In the last year Poly Union Chemical Holding Group had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥6.0b. That's not what we would hope to see.

Caveat Emptor

While Poly Union Chemical Holding Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥428m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥495m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should be aware of the 1 warning sign we've spotted with Poly Union Chemical Holding Group .

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.

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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.