Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Guangzhou Sanfu New Materials Technology Co.,Ltd (SHSE:688359) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Guangzhou Sanfu New Materials TechnologyLtd Carry?
As you can see below, at the end of September 2023, Guangzhou Sanfu New Materials TechnologyLtd had CN¥234.1m of debt, up from CN¥57.4m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥71.0m, its net debt is less, at about CN¥163.0m.
How Strong Is Guangzhou Sanfu New Materials TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Guangzhou Sanfu New Materials TechnologyLtd had liabilities of CN¥338.7m due within a year, and liabilities of CN¥121.9m falling due after that. On the other hand, it had cash of CN¥71.0m and CN¥304.8m worth of receivables due within a year. So its liabilities total CN¥84.8m more than the combination of its cash and short-term receivables.
Having regard to Guangzhou Sanfu New Materials TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.53b company is short on cash, but still worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangzhou Sanfu New Materials TechnologyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Guangzhou Sanfu New Materials TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥420m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Guangzhou Sanfu New Materials TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥46m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥97m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Guangzhou Sanfu New Materials TechnologyLtd (1 is a bit unpleasant) you should be aware of.
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.
