Is Nanya New Material TechnologyLtd (SHSE:688519) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Nanya New Material Technology Co.,Ltd (SHSE:688519) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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.

Check out our latest analysis for Nanya New Material TechnologyLtd

What Is Nanya New Material TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Nanya New Material TechnologyLtd had debt of CN¥406.2m at the end of March 2024, a reduction from CN¥438.4m over a year. However, its balance sheet shows it holds CN¥432.9m in cash, so it actually has CN¥26.7m net cash.

How Strong Is Nanya New Material TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Nanya New Material TechnologyLtd had liabilities of CN¥1.77b due within 12 months, and liabilities of CN¥202.3m due beyond 12 months. On the other hand, it had cash of CN¥432.9m and CN¥1.82b worth of receivables due within a year. So it actually has CN¥277.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanya New Material TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanya New Material TechnologyLtd 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 you can't view debt in total isolation; since Nanya New Material TechnologyLtd will need earnings to service that debt. 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.

Over 12 months, Nanya New Material TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is Nanya New Material TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Nanya New Material TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥139m and booked a CN¥110m accounting loss. But the saving grace is the CN¥26.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nanya New Material TechnologyLtd (of which 1 is potentially serious!) you should know about.

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.