These 4 Measures Indicate That CNNC Hua Yuan Titanium Dioxide (SZSE:002145) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CNNC Hua Yuan Titanium Dioxide

What Is CNNC Hua Yuan Titanium Dioxide's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 CNNC Hua Yuan Titanium Dioxide had debt of CN¥3.90b, up from CN¥2.88b in one year. But on the other hand it also has CN¥7.06b in cash, leading to a CN¥3.16b net cash position.

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

According to the last reported balance sheet, CNNC Hua Yuan Titanium Dioxide had liabilities of CN¥5.69b due within 12 months, and liabilities of CN¥1.37b due beyond 12 months. Offsetting this, it had CN¥7.06b in cash and CN¥1.30b in receivables that were due within 12 months. So it actually has CN¥1.30b 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. Simply put, the fact that CNNC Hua Yuan Titanium Dioxide has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, CNNC Hua Yuan Titanium Dioxide grew its EBIT by 359% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is CNNC Hua Yuan Titanium Dioxide'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, CNNC Hua Yuan Titanium Dioxide saw substantial negative free cash flow, in total. 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¥3.16b, as well as more liquid assets than liabilities. And we liked the look of last year's 359% year-on-year EBIT growth. So we don't have any problem with CNNC Hua Yuan Titanium Dioxide's use of debt. 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. We've identified 2 warning signs with CNNC Hua Yuan Titanium Dioxide (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.