Does Rastar Environmental Protection Materials (SZSE:300834) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Rastar Environmental Protection Materials Co., Ltd. (SZSE:300834) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Rastar Environmental Protection Materials

What Is Rastar Environmental Protection Materials's Debt?

As you can see below, at the end of March 2024, Rastar Environmental Protection Materials had CN¥121.9m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥699.2m in cash, leading to a CN¥577.3m net cash position.

A Look At Rastar Environmental Protection Materials' Liabilities

The latest balance sheet data shows that Rastar Environmental Protection Materials had liabilities of CN¥432.3m due within a year, and liabilities of CN¥9.87m falling due after that. On the other hand, it had cash of CN¥699.2m and CN¥535.3k worth of receivables due within a year. So it actually has CN¥257.5m more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Rastar Environmental Protection Materials if management cannot prevent a repeat of the 39% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Rastar Environmental Protection Materials 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Rastar Environmental Protection Materials 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. Over the last three years, Rastar Environmental Protection Materials recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rastar Environmental Protection Materials has net cash of CN¥577.3m, as well as more liquid assets than liabilities. So while Rastar Environmental Protection Materials does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Rastar Environmental Protection Materials (of which 1 doesn't sit too well with us!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com