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.' 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. We can see that Xinxiang Chemical Fiber Co., Ltd. (SZSE:000949) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Xinxiang Chemical Fiber
What Is Xinxiang Chemical Fiber's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Xinxiang Chemical Fiber had CN¥4.45b of debt, an increase on CN¥4.00b, over one year. On the flip side, it has CN¥1.47b in cash leading to net debt of about CN¥2.98b.
How Strong Is Xinxiang Chemical Fiber's Balance Sheet?
We can see from the most recent balance sheet that Xinxiang Chemical Fiber had liabilities of CN¥3.13b falling due within a year, and liabilities of CN¥3.27b due beyond that. Offsetting this, it had CN¥1.47b in cash and CN¥1.36b in receivables that were due within 12 months. So its liabilities total CN¥3.57b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CN¥4.14b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xinxiang Chemical Fiber 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.
Over 12 months, Xinxiang Chemical Fiber made a loss at the EBIT level, and saw its revenue drop to CN¥7.1b, which is a fall of 13%. That's not what we would hope to see.
Caveat Emptor
While Xinxiang Chemical Fiber'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¥109m 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¥408m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should be aware of the 2 warning signs we've spotted with Xinxiang Chemical Fiber .
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.