Does BSM ChemicalLtd (SZSE:300796) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, BSM Chemical Co.,Ltd. (SZSE:300796) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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.

View our latest analysis for BSM ChemicalLtd

How Much Debt Does BSM ChemicalLtd Carry?

As you can see below, at the end of March 2024, BSM ChemicalLtd had CN¥685.1m of debt, up from CN¥236.0m a year ago. Click the image for more detail. On the flip side, it has CN¥671.5m in cash leading to net debt of about CN¥13.6m.

How Healthy Is BSM ChemicalLtd's Balance Sheet?

The latest balance sheet data shows that BSM ChemicalLtd had liabilities of CN¥808.2m due within a year, and liabilities of CN¥434.4m falling due after that. Offsetting these obligations, it had cash of CN¥671.5m as well as receivables valued at CN¥195.4m due within 12 months. So its liabilities total CN¥375.6m more than the combination of its cash and short-term receivables.

Of course, BSM ChemicalLtd has a market capitalization of CN¥4.76b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, BSM ChemicalLtd has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

BSM ChemicalLtd's net debt is only 0.11 times its EBITDA. And its EBIT easily covers its interest expense, being 16k times the size. So we're pretty relaxed about its super-conservative use of debt. In fact BSM ChemicalLtd's saving grace is its low debt levels, because its EBIT has tanked 69% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 BSM ChemicalLtd'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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, BSM ChemicalLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

We feel some trepidation about BSM ChemicalLtd's difficulty EBIT growth rate, but we've got positives to focus on, too. To wit both its interest cover and net debt to EBITDA were encouraging signs. Taking the abovementioned factors together we do think BSM ChemicalLtd's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. Be aware that BSM ChemicalLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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