Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Xining Special Steel.Co.,Ltd (SHSE:600117) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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?

As you can see below, Xining Special Steel.Co.Ltd had CN¥3.13b of debt at March 2024, down from CN¥9.57b a year prior. However, because it has a cash reserve of CN¥160.4m, its net debt is less, at about CN¥2.97b.

How Healthy 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¥3.03b due within 12 months and liabilities of CN¥2.90b due beyond that. Offsetting these obligations, it had cash of CN¥160.4m as well as receivables valued at CN¥1.07b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.69b.

This is a mountain of leverage relative to its market capitalization of CN¥6.80b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xining Special Steel.Co.Ltd'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.

In the last year Xining Special Steel.Co.Ltd had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥4.8b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Xining Special Steel.Co.Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥851m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 2 warning signs for Xining Special Steel.Co.Ltd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com