Jiangsu Sidike New Materials Science & Technology (SZSE:300806) Seems To Be Using A Lot Of Debt

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 Jiangsu Sidike New Materials Science & Technology Co., Ltd. (SZSE:300806) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jiangsu Sidike New Materials Science & Technology

How Much Debt Does Jiangsu Sidike New Materials Science & Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Sidike New Materials Science & Technology had debt of CN¥3.68b, up from CN¥3.31b in one year. However, because it has a cash reserve of CN¥269.8m, its net debt is less, at about CN¥3.41b.

How Healthy Is Jiangsu Sidike New Materials Science & Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Sidike New Materials Science & Technology had liabilities of CN¥2.39b due within 12 months and liabilities of CN¥2.71b due beyond that. On the other hand, it had cash of CN¥269.8m and CN¥1.20b worth of receivables due within a year. So it has liabilities totalling CN¥3.62b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥4.53b, so it does suggest shareholders should keep an eye on Jiangsu Sidike New Materials Science & Technology's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Jiangsu Sidike New Materials Science & Technology shareholders face the double whammy of a high net debt to EBITDA ratio (9.8), and fairly weak interest coverage, since EBIT is just 0.88 times the interest expense. This means we'd consider it to have a heavy debt load. Worse, Jiangsu Sidike New Materials Science & Technology's EBIT was down 61% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangsu Sidike New Materials Science & Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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, Jiangsu Sidike New Materials Science & Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Jiangsu Sidike New Materials Science & Technology's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to instill confidence. After considering the datapoints discussed, we think Jiangsu Sidike New Materials Science & Technology has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Jiangsu Sidike New Materials Science & Technology (of which 3 don't sit too well with us!) you should know about.

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.

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