David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Liaoning Cheng Da Co., Ltd. (SHSE:600739) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Liaoning Cheng Da Carry?
As you can see below, at the end of March 2024, Liaoning Cheng Da had CN¥14.4b of debt, up from CN¥13.6b a year ago. Click the image for more detail. On the flip side, it has CN¥6.79b in cash leading to net debt of about CN¥7.59b.
How Strong Is Liaoning Cheng Da's Balance Sheet?
We can see from the most recent balance sheet that Liaoning Cheng Da had liabilities of CN¥11.9b falling due within a year, and liabilities of CN¥3.64b due beyond that. On the other hand, it had cash of CN¥6.79b and CN¥1.80b worth of receivables due within a year. So it has liabilities totalling CN¥6.91b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Liaoning Cheng Da is worth CN¥15.8b, 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 you can't view debt in total isolation; since Liaoning Cheng Da will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Liaoning Cheng Da had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥11b. That's not what we would hope to see.
Caveat Emptor
Not only did Liaoning Cheng Da's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥112m at the EBIT level. 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. Another cause for caution is that is bled CN¥490m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Liaoning Cheng Da (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.