Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that North Huajin Chemical Industries Co.,Ltd (SZSE:000059) does have debt on its balance sheet. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for North Huajin Chemical IndustriesLtd
How Much Debt Does North Huajin Chemical IndustriesLtd Carry?
As you can see below, North Huajin Chemical IndustriesLtd had CN¥11.1b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥6.10b in cash leading to net debt of about CN¥5.05b.
How Healthy Is North Huajin Chemical IndustriesLtd's Balance Sheet?
We can see from the most recent balance sheet that North Huajin Chemical IndustriesLtd had liabilities of CN¥4.82b falling due within a year, and liabilities of CN¥9.29b due beyond that. Offsetting this, it had CN¥6.10b in cash and CN¥933.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.08b.
This deficit is considerable relative to its market capitalization of CN¥8.57b, so it does suggest shareholders should keep an eye on North Huajin Chemical IndustriesLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 North Huajin Chemical IndustriesLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year North Huajin Chemical IndustriesLtd had a loss before interest and tax, and actually shrunk its revenue by 5.7%, to CN¥46b. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months North Huajin Chemical IndustriesLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥68m. 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. We would feel better if it turned its trailing twelve month loss of CN¥376m into a profit. In the meantime, we consider the stock very risky. 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. We've identified 1 warning sign with North Huajin Chemical IndustriesLtd , 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.
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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.