Would China Shuifa Singyes New Materials Holdings (HKG:8073) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 China Shuifa Singyes New Materials Holdings Limited (HKG:8073) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Shuifa Singyes New Materials Holdings

What Is China Shuifa Singyes New Materials Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 China Shuifa Singyes New Materials Holdings had CN¥40.4m of debt, an increase on CN¥34.0m, over one year. On the flip side, it has CN¥22.7m in cash leading to net debt of about CN¥17.7m.

A Look At China Shuifa Singyes New Materials Holdings' Liabilities

We can see from the most recent balance sheet that China Shuifa Singyes New Materials Holdings had liabilities of CN¥88.9m falling due within a year, and liabilities of CN¥3.21m due beyond that. On the other hand, it had cash of CN¥22.7m and CN¥72.2m worth of receivables due within a year. So it can boast CN¥2.74m more liquid assets than total liabilities.

This state of affairs indicates that China Shuifa Singyes New Materials Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥141.0m company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Shuifa Singyes New Materials Holdings's earnings that will influence how the balance sheet holds up in the future. 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, China Shuifa Singyes New Materials Holdings reported revenue of CN¥107m, which is a gain of 60%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though China Shuifa Singyes New Materials Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CN¥39m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for China Shuifa Singyes New Materials Holdings you should be aware of, and 1 of them is potentially serious.

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.