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. Importantly, Yunnan Coal & Energy Co.,Ltd. (SHSE:600792) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Yunnan Coal & EnergyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2024 Yunnan Coal & EnergyLtd had debt of CN¥2.25b, up from CN¥1.65b in one year. However, it also had CN¥343.9m in cash, and so its net debt is CN¥1.91b.
A Look At Yunnan Coal & EnergyLtd's Liabilities
We can see from the most recent balance sheet that Yunnan Coal & EnergyLtd had liabilities of CN¥5.52b falling due within a year, and liabilities of CN¥1.47b due beyond that. Offsetting this, it had CN¥343.9m in cash and CN¥4.39b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.25b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Yunnan Coal & EnergyLtd is worth CN¥4.63b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Yunnan Coal & EnergyLtd's earnings that will influence how the balance sheet holds up in the future. 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 Yunnan Coal & EnergyLtd had a loss before interest and tax, and actually shrunk its revenue by 3.2%, to CN¥7.1b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Yunnan Coal & EnergyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥210m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥291m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Yunnan Coal & EnergyLtd (including 3 which are significant) .
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.
