Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Anshan Senyuan Road and Bridge Co., Ltd (SZSE:300210) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Anshan Senyuan Road and Bridge
What Is Anshan Senyuan Road and Bridge's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Anshan Senyuan Road and Bridge had debt of CN¥371.6m, up from CN¥319.3m in one year. However, because it has a cash reserve of CN¥14.0m, its net debt is less, at about CN¥357.6m.
A Look At Anshan Senyuan Road and Bridge's Liabilities
The latest balance sheet data shows that Anshan Senyuan Road and Bridge had liabilities of CN¥471.7m due within a year, and liabilities of CN¥67.9m falling due after that. Offsetting these obligations, it had cash of CN¥14.0m as well as receivables valued at CN¥223.0m due within 12 months. So it has liabilities totalling CN¥302.7m more than its cash and near-term receivables, combined.
Since publicly traded Anshan Senyuan Road and Bridge shares are worth a total of CN¥5.44b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anshan Senyuan Road and Bridge will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Anshan Senyuan Road and Bridge made a loss at the EBIT level, and saw its revenue drop to CN¥173m, which is a fall of 18%. That's not what we would hope to see.
Caveat Emptor
While Anshan Senyuan Road and Bridge'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¥99m 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. However, it doesn't help that it burned through CN¥13m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Anshan Senyuan Road and Bridge is showing 3 warning signs in our investment analysis , you should know about...
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.