Is CNNC Hua Yuan Titanium Dioxide (SZSE:002145) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CNNC Hua Yuan Titanium Dioxide

What Is CNNC Hua Yuan Titanium Dioxide's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 CNNC Hua Yuan Titanium Dioxide had CN¥4.03b of debt, an increase on CN¥1.62b, over one year. However, its balance sheet shows it holds CN¥7.67b in cash, so it actually has CN¥3.63b net cash.

How Strong 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¥5.43b falling due within a year, and liabilities of CN¥1.73b due beyond that. Offsetting these obligations, it had cash of CN¥7.67b as well as receivables valued at CN¥1.19b due within 12 months. So it can boast 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!

It is just as well that CNNC Hua Yuan Titanium Dioxide's load is not too heavy, because its EBIT was down 27% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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. CNNC Hua Yuan Titanium Dioxide may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, CNNC Hua Yuan Titanium Dioxide burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥3.63b, as well as more liquid assets than liabilities. So while CNNC Hua Yuan Titanium Dioxide does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with CNNC Hua Yuan Titanium Dioxide (including 1 which is concerning) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com