David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Xining Special Steel.Co.,Ltd (SHSE:600117) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Xining Special Steel.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Xining Special Steel.Co.Ltd had CN¥3.09b of debt in September 2024, down from CN¥8.55b, one year before. However, it also had CN¥112.0m in cash, and so its net debt is CN¥2.97b.

How Strong Is Xining Special Steel.Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xining Special Steel.Co.Ltd had liabilities of CN¥3.24b due within 12 months and liabilities of CN¥2.66b due beyond that. Offsetting this, it had CN¥112.0m in cash and CN¥971.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.82b.

Xining Special Steel.Co.Ltd has a market capitalization of CN¥9.24b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Xining Special Steel.Co.Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xining Special Steel.Co.Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to CN¥5.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Xining Special Steel.Co.Ltd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥8.1m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥716m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Xining Special Steel.Co.Ltd 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.

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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.