Grinm Advanced Materials (SHSE:600206) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Grinm Advanced Materials Co., Ltd. (SHSE:600206) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Grinm Advanced Materials

What Is Grinm Advanced Materials's Net Debt?

As you can see below, at the end of September 2024, Grinm Advanced Materials had CN¥1.32b of debt, up from CN¥996.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.34b in cash, so it actually has CN¥21.4m net cash.

A Look At Grinm Advanced Materials' Liabilities

The latest balance sheet data shows that Grinm Advanced Materials had liabilities of CN¥2.03b due within a year, and liabilities of CN¥326.7m falling due after that. Offsetting this, it had CN¥1.34b in cash and CN¥1.48b in receivables that were due within 12 months. So it actually has CN¥459.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Grinm Advanced Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Grinm Advanced Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Grinm Advanced Materials has increased its EBIT by 6.1% over twelve months, which should ease any concerns about debt repayment. 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 Grinm Advanced Materials'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Grinm Advanced 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, Grinm Advanced Materials burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Grinm Advanced Materials has CN¥21.4m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.1% over the last year. So we don't have any problem with Grinm Advanced Materials's use of debt. 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. Be aware that Grinm Advanced Materials is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.