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. As with many other companies Leshan Giantstar Farming&Husbandry Corporation Limited (SHSE:603477) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Leshan Giantstar Farming&Husbandry Carry?
As you can see below, at the end of December 2023, Leshan Giantstar Farming&Husbandry had CN¥2.77b of debt, up from CN¥2.14b a year ago. Click the image for more detail. However, it does have CN¥445.8m in cash offsetting this, leading to net debt of about CN¥2.32b.
How Strong Is Leshan Giantstar Farming&Husbandry's Balance Sheet?
The latest balance sheet data shows that Leshan Giantstar Farming&Husbandry had liabilities of CN¥2.78b due within a year, and liabilities of CN¥1.85b falling due after that. On the other hand, it had cash of CN¥445.8m and CN¥58.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.12b.
Leshan Giantstar Farming&Husbandry has a market capitalization of CN¥17.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Leshan Giantstar Farming&Husbandry can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Leshan Giantstar Farming&Husbandry's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Importantly, Leshan Giantstar Farming&Husbandry had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥398m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥1.1b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Leshan Giantstar Farming&Husbandry has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.