Does Changzhou Tronly New Electronic Materials (SZSE:300429) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Changzhou Tronly New Electronic Materials

How Much Debt Does Changzhou Tronly New Electronic Materials Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Changzhou Tronly New Electronic Materials had debt of CN¥1.47b, up from CN¥1.38b in one year. However, it does have CN¥514.2m in cash offsetting this, leading to net debt of about CN¥957.9m.

How Strong Is Changzhou Tronly New Electronic Materials' Balance Sheet?

The latest balance sheet data shows that Changzhou Tronly New Electronic Materials had liabilities of CN¥823.2m due within a year, and liabilities of CN¥1.09b falling due after that. On the other hand, it had cash of CN¥514.2m and CN¥191.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.21b.

Of course, Changzhou Tronly New Electronic Materials has a market capitalization of CN¥7.02b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Changzhou Tronly New Electronic Materials'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.

Over 12 months, Changzhou Tronly New Electronic Materials reported revenue of CN¥874m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Changzhou Tronly New Electronic Materials produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥38m. 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. Another cause for caution is that is bled CN¥194m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Changzhou Tronly New Electronic Materials you should be aware of, and 2 of them make us uncomfortable.

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.