Poly Union Chemical Holding Group (SZSE:002037) Has Debt But No Earnings; Should You Worry?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Poly Union Chemical Holding Group Co., Ltd. (SZSE:002037) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Poly Union Chemical Holding Group

What Is Poly Union Chemical Holding Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Poly Union Chemical Holding Group had CN¥6.55b in debt in March 2024; about the same as the year before. However, it also had CN¥1.35b in cash, and so its net debt is CN¥5.19b.

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¥10.1b due within 12 months, and liabilities of CN¥3.64b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.35b as well as receivables valued at CN¥7.13b due within 12 months. So its liabilities total CN¥5.22b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥3.70b 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Poly Union Chemical Holding Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Poly Union Chemical Holding Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Poly Union Chemical Holding Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥263m 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¥1.0b over the last twelve months. So suffice it to say we 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. For example, we've discovered 3 warning signs for Poly Union Chemical Holding Group that you should be aware of before investing here.

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.

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