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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Yunnan Lincang Xinyuan Germanium Industry Co.,LTD (SZSE:002428) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yunnan Lincang Xinyuan Germanium IndustryLTD

What Is Yunnan Lincang Xinyuan Germanium IndustryLTD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Yunnan Lincang Xinyuan Germanium IndustryLTD had CN¥671.2m of debt, an increase on CN¥526.3m, over one year. However, it also had CN¥143.3m in cash, and so its net debt is CN¥527.8m.

How Strong Is Yunnan Lincang Xinyuan Germanium IndustryLTD's Balance Sheet?

The latest balance sheet data shows that Yunnan Lincang Xinyuan Germanium IndustryLTD had liabilities of CN¥583.1m due within a year, and liabilities of CN¥414.2m falling due after that. Offsetting this, it had CN¥143.3m in cash and CN¥163.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥690.1m.

Since publicly traded Yunnan Lincang Xinyuan Germanium IndustryLTD shares are worth a total of CN¥9.08b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Yunnan Lincang Xinyuan Germanium IndustryLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Yunnan Lincang Xinyuan Germanium IndustryLTD made a loss at the EBIT level, and saw its revenue drop to CN¥508m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did Yunnan Lincang Xinyuan Germanium IndustryLTD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥129m 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¥89m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like Yunnan Lincang Xinyuan Germanium IndustryLTD I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.