Is Global New Material International Holdings (HKG:6616) A Risky Investment?

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 Global New Material International Holdings Limited (HKG:6616) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Global New Material International Holdings's Debt?

As you can see below, at the end of December 2024, Global New Material International Holdings had CN¥2.43b of debt, up from CN¥908.8m a year ago. Click the image for more detail. But it also has CN¥3.47b in cash to offset that, meaning it has CN¥1.04b net cash.

A Look At Global New Material International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Global New Material International Holdings had liabilities of CN¥1.22b due within 12 months and liabilities of CN¥1.49b due beyond that. Offsetting this, it had CN¥3.47b in cash and CN¥512.8m in receivables that were due within 12 months. So it actually has CN¥1.28b more liquid assets than total liabilities.

This excess liquidity suggests that Global New Material International Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Global New Material International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Global New Material International Holdings

It is well worth noting that Global New Material International Holdings's EBIT shot up like bamboo after rain, gaining 82% in the last twelve months. That'll make it easier to manage its debt. 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 Global New Material International Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Global New Material International Holdings 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. During the last three years, Global New Material International Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Global New Material International Holdings has net cash of CN¥1.04b, as well as more liquid assets than liabilities. And we liked the look of last year's 82% year-on-year EBIT growth. So we don't have any problem with Global New Material International Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Global New Material International Holdings you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.