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.' 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. We can see that Shijiazhuang ChangShan BeiMing Technology Co.,Ltd (SZSE:000158) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Debt?
As you can see below, Shijiazhuang ChangShan BeiMing TechnologyLtd had CN¥5.39b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.37b in cash, and so its net debt is CN¥4.02b.
How Healthy Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Shijiazhuang ChangShan BeiMing TechnologyLtd had liabilities of CN¥8.00b due within a year, and liabilities of CN¥1.32b falling due after that. Offsetting this, it had CN¥1.37b in cash and CN¥3.37b in receivables that were due within 12 months. So its liabilities total CN¥4.58b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Shijiazhuang ChangShan BeiMing TechnologyLtd is worth CN¥14.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shijiazhuang ChangShan BeiMing TechnologyLtd'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 Shijiazhuang ChangShan BeiMing TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥8.5b. We would much prefer see growth.
Caveat Emptor
While Shijiazhuang ChangShan BeiMing TechnologyLtd'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¥658m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥202m. So we do think this stock is quite risky. 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. We've identified 3 warning signs with Shijiazhuang ChangShan BeiMing TechnologyLtd (at least 2 which are concerning) , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
