Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Jiangsu Shuangxing Color Plastic New Materials Co., Ltd. (SZSE:002585) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

As you can see below, at the end of June 2024, Jiangsu Shuangxing Color Plastic New Materials had CN¥1.34b of debt, up from CN¥972.9m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥489.5m, its net debt is less, at about CN¥848.8m.

How Strong Is Jiangsu Shuangxing Color Plastic New Materials' Balance Sheet?

The latest balance sheet data shows that Jiangsu Shuangxing Color Plastic New Materials had liabilities of CN¥3.43b due within a year, and liabilities of CN¥464.3m falling due after that. Offsetting these obligations, it had cash of CN¥489.5m as well as receivables valued at CN¥1.36b due within 12 months. So its liabilities total CN¥2.04b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jiangsu Shuangxing Color Plastic New Materials is worth CN¥5.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 8.1%, to CN¥5.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Jiangsu Shuangxing Color Plastic New Materials produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥539m at the EBIT level. 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. Another cause for caution is that is bled CN¥374m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jiangsu Shuangxing Color Plastic New Materials is showing 1 warning sign in our investment analysis , you should know about...

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.