Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Yunnan Coal & Energy Co.,Ltd. (SHSE:600792) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Yunnan Coal & EnergyLtd
What Is Yunnan Coal & EnergyLtd's Net Debt?
As you can see below, at the end of September 2023, Yunnan Coal & EnergyLtd had CN¥1.65b of debt, up from CN¥1.27b a year ago. Click the image for more detail. On the flip side, it has CN¥481.4m in cash leading to net debt of about CN¥1.17b.
How Healthy Is Yunnan Coal & EnergyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yunnan Coal & EnergyLtd had liabilities of CN¥4.55b due within 12 months and liabilities of CN¥1.77b due beyond that. Offsetting these obligations, it had cash of CN¥481.4m as well as receivables valued at CN¥3.23b due within 12 months. So its liabilities total CN¥2.60b more than the combination of its cash and short-term receivables.
Yunnan Coal & EnergyLtd has a market capitalization of CN¥5.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yunnan Coal & EnergyLtd will need earnings to service that debt. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Caveat Emptor
Importantly, Yunnan Coal & EnergyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥70m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥1.0b of cash over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Yunnan Coal & EnergyLtd has 2 warning signs we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.