Does CNNC Hua Yuan Titanium Dioxide (SZSE:002145) Have A Healthy Balance Sheet?

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. Importantly, CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CNNC Hua Yuan Titanium Dioxide

What Is CNNC Hua Yuan Titanium Dioxide's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CNNC Hua Yuan Titanium Dioxide had CN¥4.00b of debt, an increase on CN¥3.23b, over one year. However, its balance sheet shows it holds CN¥7.04b in cash, so it actually has CN¥3.04b net cash.

How Healthy Is CNNC Hua Yuan Titanium Dioxide's Balance Sheet?

We can see from the most recent balance sheet that CNNC Hua Yuan Titanium Dioxide had liabilities of CN¥5.82b falling due within a year, and liabilities of CN¥1.08b due beyond that. On the other hand, it had cash of CN¥7.04b and CN¥1.57b worth of receivables due within a year. So it actually has CN¥1.71b more liquid assets than total liabilities.

This surplus suggests that CNNC Hua Yuan Titanium Dioxide has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CNNC Hua Yuan Titanium Dioxide boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CNNC Hua Yuan Titanium Dioxide has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CNNC Hua Yuan Titanium Dioxide's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CNNC Hua Yuan Titanium Dioxide has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, CNNC Hua Yuan Titanium Dioxide saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CNNC Hua Yuan Titanium Dioxide has net cash of CN¥3.04b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 57% over the last year. So we are not troubled with CNNC Hua Yuan Titanium Dioxide's debt use. 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. Be aware that CNNC Hua Yuan Titanium Dioxide is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.