Crystal Clear Electronic MaterialLtd (SZSE:300655) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Crystal Clear Electronic Material Co.,Ltd (SZSE:300655) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Crystal Clear Electronic MaterialLtd

How Much Debt Does Crystal Clear Electronic MaterialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Crystal Clear Electronic MaterialLtd had CN¥1.09b of debt, an increase on CN¥912.4m, over one year. However, it does have CN¥1.87b in cash offsetting this, leading to net cash of CN¥782.5m.

How Healthy Is Crystal Clear Electronic MaterialLtd's Balance Sheet?

We can see from the most recent balance sheet that Crystal Clear Electronic MaterialLtd had liabilities of CN¥676.9m falling due within a year, and liabilities of CN¥1.01b due beyond that. Offsetting these obligations, it had cash of CN¥1.87b as well as receivables valued at CN¥551.9m due within 12 months. So it can boast CN¥742.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Crystal Clear Electronic MaterialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Crystal Clear Electronic MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Crystal Clear Electronic MaterialLtd's EBIT fell a jaw-dropping 45% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Crystal Clear Electronic MaterialLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Crystal Clear Electronic MaterialLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Crystal Clear Electronic MaterialLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Crystal Clear Electronic MaterialLtd has CN¥782.5m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Crystal Clear Electronic MaterialLtd's balance sheet. 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. We've identified 1 warning sign with Crystal Clear Electronic MaterialLtd , and understanding them should be part of your investment process.

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.

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