Ganzhou Tengyuan Cobalt New Material (SZSE:301219) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Ganzhou Tengyuan Cobalt New Material

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

As you can see below, at the end of March 2024, Ganzhou Tengyuan Cobalt New Material had CN¥302.4m of debt, up from CN¥77.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥3.76b in cash, leading to a CN¥3.46b net cash position.

A Look At Ganzhou Tengyuan Cobalt New Material's Liabilities

The latest balance sheet data shows that Ganzhou Tengyuan Cobalt New Material had liabilities of CN¥1.31b due within a year, and liabilities of CN¥220.1m falling due after that. Offsetting these obligations, it had cash of CN¥3.76b as well as receivables valued at CN¥541.1m due within 12 months. So it actually has CN¥2.77b 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. Given it has easily adequate short term liquidity, we don't think it will have any 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¥495m. 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 Ganzhou Tengyuan Cobalt New Material's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last year, Ganzhou Tengyuan Cobalt New Material's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ganzhou Tengyuan Cobalt New Material has net cash of CN¥3.46b, as well as more liquid assets than liabilities. So we don't think Ganzhou Tengyuan Cobalt New Material's use of debt is risky. 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 3 warning signs we've spotted with Ganzhou Tengyuan Cobalt New Material .

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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