China Singyes New Materials Holdings (HKG:8073) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, China Singyes New Materials Holdings Limited (HKG:8073) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Our analysis indicates that 8073 is potentially overvalued!

What Is China Singyes New Materials Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 China Singyes New Materials Holdings had debt of CN¥36.0m, up from none in one year. But it also has CN¥60.8m in cash to offset that, meaning it has CN¥24.8m net cash.

A Look At China Singyes New Materials Holdings' Liabilities

According to the last reported balance sheet, China Singyes New Materials Holdings had liabilities of CN¥73.5m due within 12 months, and liabilities of CN¥32.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥60.8m as well as receivables valued at CN¥122.5m due within 12 months. So it can boast CN¥77.3m more liquid assets than total liabilities.

This luscious liquidity implies that China Singyes New Materials Holdings' 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 Singyes New Materials Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Singyes New Materials Holdings 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.

Over 12 months, China Singyes New Materials Holdings reported revenue of CN¥124m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is China Singyes New Materials Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year China Singyes New Materials Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥1.9m of cash and made a loss of CN¥21m. Given it only has net cash of CN¥24.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example China Singyes New Materials Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.