Here's Why Sinolong New Materials (SZSE:301565) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Sinolong New Materials Co., Ltd. (SZSE:301565) makes use of debt. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sinolong New Materials

What Is Sinolong New Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that Sinolong New Materials had CN¥206.9m of debt in September 2024, down from CN¥352.8m, one year before. But it also has CN¥1.06b in cash to offset that, meaning it has CN¥855.8m net cash.

How Strong Is Sinolong New Materials' Balance Sheet?

According to the last reported balance sheet, Sinolong New Materials had liabilities of CN¥1.05b due within 12 months, and liabilities of CN¥218.8m due beyond 12 months. On the other hand, it had cash of CN¥1.06b and CN¥301.1m worth of receivables due within a year. So it can boast CN¥98.7m more liquid assets than total liabilities.

Having regard to Sinolong New Materials' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥7.97b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Sinolong New Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Sinolong New Materials's saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sinolong New Materials's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. Sinolong New Materials 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. During the last three years, Sinolong New Materials generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sinolong New Materials has CN¥855.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥272m. So we don't have any problem with Sinolong New Materials's use of debt. 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. For example, we've discovered 2 warning signs for Sinolong New Materials that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.