Here's Why Jiangsu Shuangxing Color Plastic New Materials (SZSE:002585) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Jiangsu Shuangxing Color Plastic New Materials Co., Ltd. (SZSE:002585) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

See our latest analysis for Jiangsu Shuangxing Color Plastic New Materials

What Is Jiangsu Shuangxing Color Plastic New Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Shuangxing Color Plastic New Materials had CN¥1.53b of debt, an increase on CN¥972.9m, over one year. However, because it has a cash reserve of CN¥550.9m, its net debt is less, at about CN¥975.4m.

A Look At Jiangsu Shuangxing Color Plastic New Materials' Liabilities

We can see from the most recent balance sheet that Jiangsu Shuangxing Color Plastic New Materials had liabilities of CN¥3.83b falling due within a year, and liabilities of CN¥474.5m due beyond that. On the other hand, it had cash of CN¥550.9m and CN¥1.27b worth of receivables due within a year. So its liabilities total CN¥2.49b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jiangsu Shuangxing Color Plastic New Materials is worth CN¥6.29b, and thus could probably raise enough capital to shore up 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 Jiangsu Shuangxing Color Plastic New Materials'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.

In the last year Jiangsu Shuangxing Color Plastic New Materials wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to CN¥5.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Jiangsu Shuangxing Color Plastic New Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥617m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥731m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangsu Shuangxing Color Plastic New Materials you should know about.

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.

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

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.