Is China Singyes New Materials Holdings (HKG:8073) Using Too Much 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.' 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 more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

View 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 at December 2021 China Singyes New Materials Holdings had debt of CN¥13.0m, up from CN¥7.73m in one year. But it also has CN¥29.0m in cash to offset that, meaning it has CN¥16.0m net cash.

How Healthy Is China Singyes New Materials Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Singyes New Materials Holdings had liabilities of CN¥80.0m falling due within a year, and liabilities of CN¥14.0m due beyond that. Offsetting this, it had CN¥29.0m in cash and CN¥147.5m in receivables that were due within 12 months. So it actually has CN¥82.4m more liquid assets than total liabilities.

This surplus liquidity suggests that China Singyes New Materials Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China Singyes New Materials Holdings reported revenue of CN¥128m, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is China Singyes New Materials Holdings?

While China Singyes New Materials Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥9.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 21% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. To that end, you should learn about the 3 warning signs we've spotted with China Singyes New Materials Holdings (including 1 which doesn't sit too well with us) .

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.