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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shaanxi Heimao Coking Co., Ltd. (SHSE:601015) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Shaanxi Heimao Coking
How Much Debt Does Shaanxi Heimao Coking Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shaanxi Heimao Coking had CN¥4.42b of debt, an increase on CN¥4.22b, over one year. However, because it has a cash reserve of CN¥2.34b, its net debt is less, at about CN¥2.08b.
How Strong Is Shaanxi Heimao Coking's Balance Sheet?
According to the last reported balance sheet, Shaanxi Heimao Coking had liabilities of CN¥9.83b due within 12 months, and liabilities of CN¥2.10b due beyond 12 months. On the other hand, it had cash of CN¥2.34b and CN¥543.0m worth of receivables due within a year. So its liabilities total CN¥9.05b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of CN¥9.78b, so it does suggest shareholders should keep an eye on Shaanxi Heimao Coking's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shaanxi Heimao Coking'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.
Over 12 months, Shaanxi Heimao Coking made a loss at the EBIT level, and saw its revenue drop to CN¥19b, which is a fall of 14%. That's not what we would hope to see.
Caveat Emptor
While Shaanxi Heimao Coking's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥206m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥226m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Shaanxi Heimao Coking you should be aware of, and 1 of them is a bit concerning.
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.