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. Importantly, Jiangsu HSC New Energy Materials Co.,LTD. (SHSE:688353) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Jiangsu HSC New Energy MaterialsLTD Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Jiangsu HSC New Energy MaterialsLTD had debt of CN¥116.4m, up from CN¥40.5m in one year. But on the other hand it also has CN¥2.31b in cash, leading to a CN¥2.19b net cash position.
A Look At Jiangsu HSC New Energy MaterialsLTD's Liabilities
Zooming in on the latest balance sheet data, we can see that Jiangsu HSC New Energy MaterialsLTD had liabilities of CN¥438.2m due within 12 months and liabilities of CN¥175.2m due beyond that. Offsetting this, it had CN¥2.31b in cash and CN¥308.7m in receivables that were due within 12 months. So it actually has CN¥2.00b more liquid assets than total liabilities.
This luscious liquidity implies that Jiangsu HSC New Energy MaterialsLTD's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Jiangsu HSC New Energy MaterialsLTD has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu HSC New Energy MaterialsLTD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Jiangsu HSC New Energy MaterialsLTD had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥556m. To be frank that doesn't bode well.
So How Risky Is Jiangsu HSC New Energy MaterialsLTD?
While Jiangsu HSC New Energy MaterialsLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥61m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. 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. Case in point: We've spotted 3 warning signs for Jiangsu HSC New Energy MaterialsLTD you should be aware of, and 2 of them can't be ignored.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.