Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Yunnan Lincang Xinyuan Germanium Industry Co.,LTD (SZSE:002428) makes use of debt. But is this debt a concern to shareholders?

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, 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.

How Much Debt Does Yunnan Lincang Xinyuan Germanium IndustryLTD Carry?

The chart below, which you can click on for greater detail, shows that Yunnan Lincang Xinyuan Germanium IndustryLTD had CN¥694.3m in debt in June 2024; about the same as the year before. However, it does have CN¥131.7m in cash offsetting this, leading to net debt of about CN¥562.6m.

How Strong Is Yunnan Lincang Xinyuan Germanium IndustryLTD's Balance Sheet?

According to the last reported balance sheet, Yunnan Lincang Xinyuan Germanium IndustryLTD had liabilities of CN¥708.5m due within 12 months, and liabilities of CN¥526.4m due beyond 12 months. Offsetting this, it had CN¥131.7m in cash and CN¥353.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥749.8m.

Since publicly traded Yunnan Lincang Xinyuan Germanium IndustryLTD shares are worth a total of CN¥7.69b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Yunnan Lincang Xinyuan Germanium IndustryLTD'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 Yunnan Lincang Xinyuan Germanium IndustryLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to CN¥738m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Yunnan Lincang Xinyuan Germanium IndustryLTD's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥12m at the EBIT level. 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. However, it doesn't help that it burned through CN¥233m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Yunnan Lincang Xinyuan Germanium IndustryLTD is showing 2 warning signs in our investment analysis , 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.