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 Shandong Xiantan Co., Ltd. (SZSE:002746) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Shandong Xiantan Carry?
The image below, which you can click on for greater detail, shows that at September 2024 Shandong Xiantan had debt of CN¥1.28b, up from CN¥902.9m in one year. But it also has CN¥3.86b in cash to offset that, meaning it has CN¥2.58b net cash.
A Look At Shandong Xiantan's Liabilities
Zooming in on the latest balance sheet data, we can see that Shandong Xiantan had liabilities of CN¥2.38b due within 12 months and liabilities of CN¥249.5m due beyond that. On the other hand, it had cash of CN¥3.86b and CN¥149.9m worth of receivables due within a year. So it actually has CN¥1.38b more liquid assets than total liabilities.
It's good to see that Shandong Xiantan has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shandong Xiantan boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shandong Xiantan'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 Shandong Xiantan had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥5.3b. We would much prefer see growth.
So How Risky Is Shandong Xiantan?
While Shandong Xiantan lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥71m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 3 warning signs for Shandong Xiantan (2 shouldn't be ignored) 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.
