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 can see that Jiangsu Shuangxing Color Plastic New Materials Co., Ltd. (SZSE:002585) does use debt in its business. But should shareholders be worried about its use of debt?
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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Jiangsu Shuangxing Color Plastic New Materials
What Is Jiangsu Shuangxing Color Plastic New Materials's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Shuangxing Color Plastic New Materials had CN¥972.9m of debt, an increase on none, over one year. On the flip side, it has CN¥732.1m in cash leading to net debt of about CN¥240.8m.
How Healthy Is Jiangsu Shuangxing Color Plastic New Materials' Balance Sheet?
According to the last reported balance sheet, Jiangsu Shuangxing Color Plastic New Materials had liabilities of CN¥2.37b due within 12 months, and liabilities of CN¥1.03b due beyond 12 months. Offsetting these obligations, it had cash of CN¥732.1m as well as receivables valued at CN¥1.54b due within 12 months. So its liabilities total CN¥1.13b more than the combination of its cash and short-term receivables.
Of course, Jiangsu Shuangxing Color Plastic New Materials has a market capitalization of CN¥9.23b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangsu Shuangxing Color Plastic New Materials's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Jiangsu Shuangxing Color Plastic New Materials had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥5.2b. To be frank that doesn't bode well.
Caveat Emptor
While Jiangsu Shuangxing Color Plastic New Materials's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥239m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥791m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu Shuangxing Color Plastic New Materials is showing 1 warning sign in our investment analysis , you should know about...
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.