The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Jiangsu Shuangxing Color Plastic New Materials Co., Ltd. (SZSE:002585) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiangsu Shuangxing Color Plastic New Materials Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Shuangxing Color Plastic New Materials had debt of CN¥1.20b, up from CN¥745.3m in one year. However, because it has a cash reserve of CN¥530.2m, its net debt is less, at about CN¥669.8m.

A Look At Jiangsu Shuangxing Color Plastic New Materials' Liabilities

According to the last reported balance sheet, Jiangsu Shuangxing Color Plastic New Materials had liabilities of CN¥3.76b due within 12 months, and liabilities of CN¥317.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥530.2m as well as receivables valued at CN¥1.70b due within 12 months. So it has liabilities totalling CN¥1.85b more than its cash and near-term receivables, combined.

Jiangsu Shuangxing Color Plastic New Materials has a market capitalization of CN¥7.03b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Shuangxing Color Plastic New Materials 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 Jiangsu Shuangxing Color Plastic New Materials had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to CN¥5.4b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Jiangsu Shuangxing Color Plastic New Materials produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥356m. 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. However, it doesn't help that it burned through CN¥92m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Jiangsu Shuangxing Color Plastic New Materials I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.