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.' 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, Tangshan Jidong Cement Co.,Ltd. (SZSE:000401) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Tangshan Jidong CementLtd
How Much Debt Does Tangshan Jidong CementLtd Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Tangshan Jidong CementLtd had CN¥21.2b of debt, an increase on CN¥17.6b, over one year. However, it does have CN¥7.35b in cash offsetting this, leading to net debt of about CN¥13.8b.
A Look At Tangshan Jidong CementLtd's Liabilities
According to the last reported balance sheet, Tangshan Jidong CementLtd had liabilities of CN¥14.4b due within 12 months, and liabilities of CN¥16.5b due beyond 12 months. On the other hand, it had cash of CN¥7.35b and CN¥4.08b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥19.5b.
Given this deficit is actually higher than the company's market capitalization of CN¥17.9b, we think shareholders really should watch Tangshan Jidong CementLtd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tangshan Jidong CementLtd 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.
In the last year Tangshan Jidong CementLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥30b. 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). Indeed, it lost CN¥648m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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¥599m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Tangshan Jidong CementLtd has 2 warning signs we think you should be aware of.
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.
