Ganzhou Tengyuan Cobalt New Material (SZSE:301219) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Ganzhou Tengyuan Cobalt New Material Co., Ltd. (SZSE:301219) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Ganzhou Tengyuan Cobalt New Material

How Much Debt Does Ganzhou Tengyuan Cobalt New Material Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ganzhou Tengyuan Cobalt New Material had CN¥188.3m of debt, an increase on CN¥154.9m, over one year. However, it does have CN¥3.35b in cash offsetting this, leading to net cash of CN¥3.16b.

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

Zooming in on the latest balance sheet data, we can see that Ganzhou Tengyuan Cobalt New Material had liabilities of CN¥1.22b due within 12 months and liabilities of CN¥247.1m due beyond that. On the other hand, it had cash of CN¥3.35b and CN¥378.3m worth of receivables due within a year. So it can boast CN¥2.26b more liquid assets than total liabilities.

It's good to see that Ganzhou Tengyuan Cobalt New Material has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues 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¥841m. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ganzhou Tengyuan Cobalt New Material may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Ganzhou Tengyuan Cobalt New Material barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ganzhou Tengyuan Cobalt New Material has CN¥3.16b in net cash and a decent-looking balance sheet. So we are not troubled with Ganzhou Tengyuan Cobalt New Material's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign 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.