These 4 Measures Indicate That China Treasures New Materials Group (HKG:2439) Is Using Debt Safely

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. We can see that China Treasures New Materials Group Ltd. (HKG:2439) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Treasures New Materials Group

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

The chart below, which you can click on for greater detail, shows that China Treasures New Materials Group had CN¥49.7m in debt in December 2023; about the same as the year before. But on the other hand it also has CN¥315.7m in cash, leading to a CN¥266.0m net cash position.

A Look At China Treasures New Materials Group's Liabilities

We can see from the most recent balance sheet that China Treasures New Materials Group had liabilities of CN¥89.8m falling due within a year, and liabilities of CN¥20.1m due beyond that. Offsetting this, it had CN¥315.7m in cash and CN¥104.3m in receivables that were due within 12 months. So it actually has CN¥310.1m more liquid assets than total liabilities.

This surplus strongly suggests that China Treasures New Materials Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China Treasures New Materials Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that China Treasures New Materials Group grew its EBIT at 11% over the last year, further increasing its ability to manage debt. 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. While China Treasures New Materials Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, China Treasures New Materials Group's free cash flow amounted to 42% 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 China Treasures New Materials Group has net cash of CN¥266.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So is China Treasures New Materials Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 China Treasures New Materials Group (of which 1 is a bit concerning!) 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.