We Think Changzhou Tronly New Electronic Materials (SZSE:300429) Has A Fair Chunk Of Debt

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. As with many other companies Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Changzhou Tronly New Electronic Materials

How Much Debt Does Changzhou Tronly New Electronic Materials Carry?

As you can see below, Changzhou Tronly New Electronic Materials had CN¥1.44b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥520.9m in cash, and so its net debt is CN¥914.2m.

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

According to the last reported balance sheet, Changzhou Tronly New Electronic Materials had liabilities of CN¥738.0m due within 12 months, and liabilities of CN¥1.12b due beyond 12 months. On the other hand, it had cash of CN¥520.9m and CN¥175.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.16b.

Since publicly traded Changzhou Tronly New Electronic Materials shares are worth a total of CN¥6.20b, it seems unlikely that this level of liabilities would be a major threat. 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 you can't view debt in total isolation; since Changzhou Tronly New Electronic Materials will need earnings to service that debt. 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¥826m, which is a gain of 2.6%, 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

Importantly, Changzhou Tronly New Electronic Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥38m 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¥200m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Be aware that Changzhou Tronly New Electronic Materials is showing 3 warning signs in our investment analysis , 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.

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