Does Jiangsu Baichuan High-Tech New Materials (SZSE:002455) Have A Healthy Balance Sheet?

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.' 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, Jiangsu Baichuan High-Tech New Materials Co., Ltd (SZSE:002455) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiangsu Baichuan High-Tech New Materials

How Much Debt Does Jiangsu Baichuan High-Tech New Materials Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Baichuan High-Tech New Materials had debt of CN¥6.79b, up from CN¥5.42b in one year. However, it also had CN¥1.39b in cash, and so its net debt is CN¥5.39b.

A Look At Jiangsu Baichuan High-Tech New Materials' Liabilities

We can see from the most recent balance sheet that Jiangsu Baichuan High-Tech New Materials had liabilities of CN¥6.68b falling due within a year, and liabilities of CN¥3.24b due beyond that. Offsetting this, it had CN¥1.39b in cash and CN¥450.7m in receivables that were due within 12 months. So its liabilities total CN¥8.07b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥6.20b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Baichuan High-Tech New Materials'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.

In the last year Jiangsu Baichuan High-Tech New Materials wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to CN¥4.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Jiangsu Baichuan High-Tech New Materials produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥461m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥779m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangsu Baichuan High-Tech New Materials you should know about.

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.