The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Tangshan Jidong Cement Co.,Ltd. (SZSE:000401) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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.

How Much Debt Does Tangshan Jidong CementLtd Carry?

The chart below, which you can click on for greater detail, shows that Tangshan Jidong CementLtd had CN¥22.2b in debt in March 2024; about the same as the year before. However, it also had CN¥6.64b in cash, and so its net debt is CN¥15.6b.

How Strong Is Tangshan Jidong CementLtd's Balance Sheet?

The latest balance sheet data shows that Tangshan Jidong CementLtd had liabilities of CN¥15.0b due within a year, and liabilities of CN¥15.7b falling due after that. Offsetting these obligations, it had cash of CN¥6.64b as well as receivables valued at CN¥3.16b due within 12 months. So it has liabilities totalling CN¥20.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥11.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tangshan Jidong CementLtd would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tangshan Jidong CementLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Tangshan Jidong CementLtd had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥26b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Tangshan Jidong CementLtd'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¥1.8b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥1.8b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tangshan Jidong CementLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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