China Treasures New Materials Group (HKG:2439) Has A Rock Solid 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 note that China Treasures New Materials Group Ltd. (HKG:2439) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for China Treasures New Materials Group

What Is China Treasures New Materials Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 China Treasures New Materials Group had debt of CN¥59.4m, up from CN¥42.4m in one year. But on the other hand it also has CN¥381.7m in cash, leading to a CN¥322.3m net cash position.

How Strong Is China Treasures New Materials Group's Balance Sheet?

We can see from the most recent balance sheet that China Treasures New Materials Group had liabilities of CN¥128.0m falling due within a year, and liabilities of CN¥9.84m due beyond that. Offsetting these obligations, it had cash of CN¥381.7m as well as receivables valued at CN¥110.9m due within 12 months. So it actually has CN¥354.8m more liquid assets than total liabilities.

This luscious liquidity implies that China Treasures New Materials Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China Treasures New Materials Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, China Treasures New Materials Group grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Treasures New Materials Group 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. China Treasures New Materials Group 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. Over the most recent three years, China Treasures New Materials Group recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Treasures New Materials Group has CN¥322.3m in net cash and a strong balance sheet. And it impressed us with its EBIT growth of 22% over the last year. When it comes to China Treasures New Materials Group's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. We've identified 1 warning sign with China Treasures New Materials Group , 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.