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.' 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 Jiangxi Black Cat Carbon Black Inc.,Ltd (SZSE:002068) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Jiangxi Black Cat Carbon BlackLtd's Debt?
As you can see below, Jiangxi Black Cat Carbon BlackLtd had CN¥2.87b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥840.8m in cash offsetting this, leading to net debt of about CN¥2.03b.
How Strong Is Jiangxi Black Cat Carbon BlackLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangxi Black Cat Carbon BlackLtd had liabilities of CN¥4.34b due within 12 months and liabilities of CN¥1.06b due beyond that. On the other hand, it had cash of CN¥840.8m and CN¥2.51b worth of receivables due within a year. So it has liabilities totalling CN¥2.05b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Jiangxi Black Cat Carbon BlackLtd has a market capitalization of CN¥6.24b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangxi Black Cat Carbon BlackLtd 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.
Over 12 months, Jiangxi Black Cat Carbon BlackLtd made a loss at the EBIT level, and saw its revenue drop to CN¥9.6b, which is a fall of 6.1%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Jiangxi Black Cat Carbon BlackLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥35m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥135m 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. For instance, we've identified 1 warning sign for Jiangxi Black Cat Carbon BlackLtd that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.