Is Ganzhou Tengyuan Cobalt New Material (SZSE:301219) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ganzhou Tengyuan Cobalt New Material Co., Ltd. (SZSE:301219) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its 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?

As you can see below, Ganzhou Tengyuan Cobalt New Material had CN¥106.9m of debt at September 2023, down from CN¥506.0m a year prior. But on the other hand it also has CN¥3.82b in cash, leading to a CN¥3.72b 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¥942.8m due within a year, and liabilities of CN¥209.0m falling due after that. Offsetting these obligations, it had cash of CN¥3.82b as well as receivables valued at CN¥434.3m due within 12 months. So it actually has CN¥3.11b 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Ganzhou Tengyuan Cobalt New Material boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ganzhou Tengyuan Cobalt New Material reported revenue of CN¥5.1b, which is a gain of 4.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Ganzhou Tengyuan Cobalt New Material?

Although Ganzhou Tengyuan Cobalt New Material had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥93m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example, we've discovered 3 warning signs for Ganzhou Tengyuan Cobalt New Material (1 is a bit concerning!) that you should be aware of before investing here.

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.