Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Anshan Senyuan Road and Bridge Co., Ltd (SZSE:300210) 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Anshan Senyuan Road and Bridge's Net Debt?
As you can see below, at the end of September 2023, Anshan Senyuan Road and Bridge had CN¥371.6m of debt, up from CN¥319.3m a year ago. Click the image for more detail. However, it also had CN¥14.0m in cash, and so its net debt is CN¥357.6m.
How Strong Is Anshan Senyuan Road and Bridge's Balance Sheet?
The latest balance sheet data shows that Anshan Senyuan Road and Bridge had liabilities of CN¥471.7m due within a year, and liabilities of CN¥67.9m falling due after that. Offsetting this, it had CN¥14.0m in cash and CN¥223.0m in receivables that were due within 12 months. So its liabilities total CN¥302.7m more than the combination of its cash and short-term receivables.
Since publicly traded Anshan Senyuan Road and Bridge shares are worth a total of CN¥6.75b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Anshan Senyuan Road and Bridge'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.
Over 12 months, Anshan Senyuan Road and Bridge made a loss at the EBIT level, and saw its revenue drop to CN¥173m, which is a fall of 18%. We would much prefer see growth.
Caveat Emptor
While Anshan Senyuan Road and Bridge's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥99m. 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¥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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Anshan Senyuan Road and Bridge you should be aware of.
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.