Does China Singyes New Materials Holdings (HKG:8073) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies China Singyes New Materials Holdings Limited (HKG:8073) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Singyes New Materials Holdings

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

The image below, which you can click on for greater detail, shows that China Singyes New Materials Holdings had debt of CN¥34.0m at the end of June 2023, a reduction from CN¥36.0m over a year. However, it does have CN¥35.9m in cash offsetting this, leading to net cash of CN¥1.81m.

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¥78.5m due within 12 months, and liabilities of CN¥28.6m due beyond 12 months. Offsetting this, it had CN¥35.9m in cash and CN¥145.7m in receivables that were due within 12 months. So it can boast CN¥74.5m more liquid assets than total liabilities.

This surplus strongly suggests that China Singyes New Materials Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that China Singyes New Materials Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Singyes New Materials Holdings 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.

In the last year China Singyes New Materials Holdings had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥67m. To be frank that doesn't bode well.

So How Risky Is China Singyes New Materials Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that China Singyes New Materials Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥8.1m of cash and made a loss of CN¥14m. Given it only has net cash of CN¥1.81m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 3 warning signs with China Singyes New Materials Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.