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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Liaoning Shenhua Holdings Co.,Ltd (SHSE:600653) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Liaoning Shenhua HoldingsLtd

What Is Liaoning Shenhua HoldingsLtd's Debt?

The chart below, which you can click on for greater detail, shows that Liaoning Shenhua HoldingsLtd had CN¥1.81b in debt in September 2023; about the same as the year before. However, because it has a cash reserve of CN¥215.4m, its net debt is less, at about CN¥1.60b.

How Healthy Is Liaoning Shenhua HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Liaoning Shenhua HoldingsLtd had liabilities of CN¥1.37b due within 12 months, and liabilities of CN¥937.0m due beyond 12 months. On the other hand, it had cash of CN¥215.4m and CN¥234.8m worth of receivables due within a year. So its liabilities total CN¥1.85b more than the combination of its cash and short-term receivables.

Liaoning Shenhua HoldingsLtd has a market capitalization of CN¥3.76b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Liaoning Shenhua HoldingsLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Liaoning Shenhua HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥5.2b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

While Liaoning Shenhua HoldingsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥92m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥13m of cash over the last year. So to be blunt we think it is risky. 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. Be aware that Liaoning Shenhua HoldingsLtd is showing 1 warning sign in our investment analysis , you should know about...

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.