David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Rongsheng Petrochemical Co., Ltd. (SZSE:002493) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for Rongsheng Petrochemical
How Much Debt Does Rongsheng Petrochemical Carry?
As you can see below, at the end of September 2023, Rongsheng Petrochemical had CN¥214.8b of debt, up from CN¥163.3b a year ago. Click the image for more detail. However, it also had CN¥32.5b in cash, and so its net debt is CN¥182.3b.
A Look At Rongsheng Petrochemical's Liabilities
According to the last reported balance sheet, Rongsheng Petrochemical had liabilities of CN¥135.2b due within 12 months, and liabilities of CN¥139.0b due beyond 12 months. On the other hand, it had cash of CN¥32.5b and CN¥8.02b worth of receivables due within a year. So it has liabilities totalling CN¥233.6b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥100.2b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Rongsheng Petrochemical would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rongsheng Petrochemical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Rongsheng Petrochemical reported revenue of CN¥303b, which is a gain of 8.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Rongsheng Petrochemical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥2.5b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥43b in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example - Rongsheng Petrochemical has 2 warning signs we think 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.