Does Levima Advanced Materials (SZSE:003022) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Levima Advanced Materials Corporation (SZSE:003022) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Levima Advanced Materials

What Is Levima Advanced Materials's Net Debt?

As you can see below, at the end of September 2024, Levima Advanced Materials had CN¥9.08b of debt, up from CN¥6.55b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥2.43b, its net debt is less, at about CN¥6.65b.

A Look At Levima Advanced Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Levima Advanced Materials had liabilities of CN¥5.71b due within 12 months and liabilities of CN¥5.22b due beyond that. Offsetting these obligations, it had cash of CN¥2.43b as well as receivables valued at CN¥248.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.25b.

Levima Advanced Materials has a market capitalization of CN¥20.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Levima Advanced 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 Levima Advanced Materials's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Levima Advanced Materials produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥57m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥2.4b of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Levima Advanced Materials has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.