Here's Why SANVO Fine Chemicals Group (HKG:301) Can Afford Some Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SANVO Fine Chemicals Group Limited (HKG:301) does carry debt. But should shareholders be worried about its use of debt?

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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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is SANVO Fine Chemicals Group's Debt?

As you can see below, at the end of December 2024, SANVO Fine Chemicals Group had CN¥257.9m of debt, up from CN¥220.2m a year ago. Click the image for more detail. However, it also had CN¥61.3m in cash, and so its net debt is CN¥196.6m.

A Look At SANVO Fine Chemicals Group's Liabilities

We can see from the most recent balance sheet that SANVO Fine Chemicals Group had liabilities of CN¥645.0m falling due within a year, and liabilities of CN¥16.2m due beyond that. Offsetting this, it had CN¥61.3m in cash and CN¥91.8m in receivables that were due within 12 months. So its liabilities total CN¥508.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥637.0m, so it does suggest shareholders should keep an eye on SANVO Fine Chemicals Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 SANVO Fine Chemicals Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for SANVO Fine Chemicals Group

Over 12 months, SANVO Fine Chemicals Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, SANVO Fine Chemicals Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥9.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥20m. So to be blunt we do think it is risky. 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. For instance, we've identified 5 warning signs for SANVO Fine Chemicals Group (1 makes us a bit uncomfortable) you should be aware of.

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.