Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shinghwa Advanced Material Group Co., Ltd. (SHSE:603026) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shinghwa Advanced Material Group

How Much Debt Does Shinghwa Advanced Material Group Carry?

As you can see below, at the end of September 2023, Shinghwa Advanced Material Group had CN¥780.8m of debt, up from CN¥322.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥859.9m in cash, so it actually has CN¥79.2m net cash.

How Healthy Is Shinghwa Advanced Material Group's Balance Sheet?

According to the last reported balance sheet, Shinghwa Advanced Material Group had liabilities of CN¥1.94b due within 12 months, and liabilities of CN¥448.4m due beyond 12 months. On the other hand, it had cash of CN¥859.9m and CN¥669.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥855.6m.

Of course, Shinghwa Advanced Material Group has a market capitalization of CN¥9.13b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Shinghwa Advanced Material Group 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 ultimately the future profitability of the business will decide if Shinghwa Advanced Material Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shinghwa Advanced Material Group had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥6.2b. That makes us nervous, to say the least.

So How Risky Is Shinghwa Advanced Material Group?

Although Shinghwa Advanced Material Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥99m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 3 warning signs for Shinghwa Advanced Material Group you should be aware of, and 1 of them is a bit unpleasant.

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.