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, China Treasures New Materials Group Ltd. (HKG:2439) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 China Treasures New Materials Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2024 China Treasures New Materials Group had CN¥72.0m of debt, an increase on CN¥49.7m, over one year. But it also has CN¥422.7m in cash to offset that, meaning it has CN¥350.7m net cash.
How Strong Is China Treasures New Materials Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China Treasures New Materials Group had liabilities of CN¥127.1m due within 12 months and liabilities of CN¥3.15m due beyond that. On the other hand, it had cash of CN¥422.7m and CN¥123.3m worth of receivables due within a year. So it can boast CN¥415.8m more liquid assets than total liabilities.
This luscious liquidity implies that China Treasures New Materials Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that China Treasures New Materials Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Check out our latest analysis for China Treasures New Materials Group
Also good is that China Treasures New Materials Group grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is China Treasures New Materials Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Treasures New Materials Group 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. Looking at the most recent three years, China Treasures New Materials Group recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, the bottom line is that China Treasures New Materials Group has net cash of CN¥350.7m and plenty of liquid assets. And it impressed us with its EBIT growth of 16% over the last year. So is China Treasures New Materials Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with China Treasures New Materials Group , and understanding them should be part of your investment process.
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.
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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.