Sunresin New MaterialsLtd (SZSE:300487) Has A Rock Solid Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sunresin New Materials Co.,Ltd (SZSE:300487) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sunresin New MaterialsLtd

What Is Sunresin New MaterialsLtd's Debt?

As you can see below, Sunresin New MaterialsLtd had CN¥458.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥2.16b in cash to offset that, meaning it has CN¥1.70b net cash.

How Healthy Is Sunresin New MaterialsLtd's Balance Sheet?

According to the last reported balance sheet, Sunresin New MaterialsLtd had liabilities of CN¥1.48b due within 12 months, and liabilities of CN¥570.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.16b as well as receivables valued at CN¥871.9m due within 12 months. So it actually has CN¥984.0m more liquid assets than total liabilities.

This surplus suggests that Sunresin New MaterialsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sunresin New MaterialsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Sunresin New MaterialsLtd grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 Sunresin New MaterialsLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sunresin New MaterialsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Sunresin New MaterialsLtd recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sunresin New MaterialsLtd has net cash of CN¥1.70b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥414m, being 77% of its EBIT. So we don't think Sunresin New MaterialsLtd's use of debt is 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. For instance, we've identified 2 warning signs for Sunresin New MaterialsLtd (1 is a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.