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.' 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, Sunresin New Materials Co.,Ltd (SZSE:300487) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Sunresin New MaterialsLtd
As you can see below, Sunresin New MaterialsLtd had CN¥458.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥2.16b in cash offsetting this, leading to net cash of CN¥1.70b.
The latest balance sheet data shows that Sunresin New MaterialsLtd had liabilities of CN¥1.48b due within a year, and liabilities of CN¥570.3m falling due after that. Offsetting these obligations, it had cash of CN¥2.16b as well as receivables valued at CN¥871.9m due within 12 months. So it actually has CN¥984.0m more liquid assets than total liabilities.
This surplus suggests that Sunresin New MaterialsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sunresin New MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Sunresin New MaterialsLtd has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sunresin New MaterialsLtd 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sunresin New MaterialsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Sunresin New MaterialsLtd recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Sunresin New MaterialsLtd has CN¥1.70b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in CN¥414m. So we don't think Sunresin New MaterialsLtd's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sunresin New MaterialsLtd (of which 1 shouldn't be ignored!) 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.
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.