Does Ganzhou Tengyuan Cobalt New Material (SZSE:301219) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Ganzhou Tengyuan Cobalt New Material Co., Ltd. (SZSE:301219) 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ganzhou Tengyuan Cobalt New Material

What Is Ganzhou Tengyuan Cobalt New Material's Net Debt?

As you can see below, at the end of September 2024, Ganzhou Tengyuan Cobalt New Material had CN¥170.2m of debt, up from CN¥106.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.07b in cash, so it actually has CN¥2.90b net cash.

How Healthy Is Ganzhou Tengyuan Cobalt New Material's Balance Sheet?

The latest balance sheet data shows that Ganzhou Tengyuan Cobalt New Material had liabilities of CN¥1.37b due within a year, and liabilities of CN¥276.8m falling due after that. Offsetting this, it had CN¥3.07b in cash and CN¥652.7m in receivables that were due within 12 months. So it can boast CN¥2.07b more liquid assets than total liabilities.

This excess liquidity suggests that Ganzhou Tengyuan Cobalt New Material is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Ganzhou Tengyuan Cobalt New Material has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Ganzhou Tengyuan Cobalt New Material turned things around in the last 12 months, delivering and EBIT of CN¥759m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ganzhou Tengyuan Cobalt New Material can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ganzhou Tengyuan Cobalt New Material 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 year, Ganzhou Tengyuan Cobalt New Material saw substantial negative free cash flow, in total. 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 Ganzhou Tengyuan Cobalt New Material has CN¥2.90b in net cash and a decent-looking balance sheet. So we don't have any problem with Ganzhou Tengyuan Cobalt New Material's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Ganzhou Tengyuan Cobalt New Material .

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.