David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Shantou Wanshun New Material Group Co., Ltd. (SZSE:300057) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Shantou Wanshun New Material Group Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shantou Wanshun New Material Group had debt of CN¥3.10b, up from CN¥2.65b in one year. However, it also had CN¥2.23b in cash, and so its net debt is CN¥870.0m.

How Healthy Is Shantou Wanshun New Material Group's Balance Sheet?

The latest balance sheet data shows that Shantou Wanshun New Material Group had liabilities of CN¥3.76b due within a year, and liabilities of CN¥970.3m falling due after that. Offsetting these obligations, it had cash of CN¥2.23b as well as receivables valued at CN¥1.70b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥797.5m.

Of course, Shantou Wanshun New Material Group has a market capitalization of CN¥4.98b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shantou Wanshun New Material Group 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.

In the last year Shantou Wanshun New Material Group had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥5.5b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shantou Wanshun New Material Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥46m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥584m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Shantou Wanshun New Material Group has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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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