Here's Why Jiangxi Black Cat Carbon BlackLtd (SZSE:002068) Can Afford Some Debt

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.' 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 Jiangxi Black Cat Carbon Black Inc.,Ltd (SZSE:002068) makes use of debt. But is this debt a concern to shareholders?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for Jiangxi Black Cat Carbon BlackLtd

What Is Jiangxi Black Cat Carbon BlackLtd's Net Debt?

As you can see below, Jiangxi Black Cat Carbon BlackLtd had CN¥2.87b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥840.8m in cash, and so its net debt is CN¥2.03b.

How Strong Is Jiangxi Black Cat Carbon BlackLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangxi Black Cat Carbon BlackLtd had liabilities of CN¥4.34b due within 12 months and liabilities of CN¥1.06b due beyond that. Offsetting this, it had CN¥840.8m in cash and CN¥2.51b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.05b.

Jiangxi Black Cat Carbon BlackLtd has a market capitalization of CN¥4.97b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangxi Black Cat Carbon BlackLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Jiangxi Black Cat Carbon BlackLtd made a loss at the EBIT level, and saw its revenue drop to CN¥9.6b, which is a fall of 6.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Jiangxi Black Cat Carbon BlackLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥35m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥135m. So in short it's a really risky stock. 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 Jiangxi Black Cat Carbon BlackLtd .

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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