Does Asymchem Laboratories (Tianjin) (SZSE:002821) 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.' 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 can see that Asymchem Laboratories (Tianjin) Co., Ltd. (SZSE:002821) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Asymchem Laboratories (Tianjin)

What Is Asymchem Laboratories (Tianjin)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Asymchem Laboratories (Tianjin) had CN¥12.2m of debt, an increase on none, over one year. But it also has CN¥8.98b in cash to offset that, meaning it has CN¥8.97b net cash.

A Look At Asymchem Laboratories (Tianjin)'s Liabilities

The latest balance sheet data shows that Asymchem Laboratories (Tianjin) had liabilities of CN¥1.77b due within a year, and liabilities of CN¥466.2m falling due after that. Offsetting this, it had CN¥8.98b in cash and CN¥1.85b in receivables that were due within 12 months. So it actually has CN¥8.59b more liquid assets than total liabilities.

This surplus strongly suggests that Asymchem Laboratories (Tianjin) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Asymchem Laboratories (Tianjin) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Asymchem Laboratories (Tianjin)'s load is not too heavy, because its EBIT was down 49% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asymchem Laboratories (Tianjin) 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, a company can only pay off debt with cold hard cash, not accounting profits. Asymchem Laboratories (Tianjin) 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. In the last three years, Asymchem Laboratories (Tianjin)'s free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Asymchem Laboratories (Tianjin) has net cash of CN¥8.97b, as well as more liquid assets than liabilities. So we are not troubled with Asymchem Laboratories (Tianjin)'s debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Asymchem Laboratories (Tianjin) , and understanding them should be part of your investment process.

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.