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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Tangshan Jidong Cement Co.,Ltd. (SZSE:000401) does use debt in its business. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
How Much Debt Does Tangshan Jidong CementLtd Carry?
The chart below, which you can click on for greater detail, shows that Tangshan Jidong CementLtd had CN¥22.2b in debt in March 2024; about the same as the year before. On the flip side, it has CN¥6.64b in cash leading to net debt of about CN¥15.6b.
How Strong Is Tangshan Jidong CementLtd's Balance Sheet?
According to the last reported balance sheet, Tangshan Jidong CementLtd had liabilities of CN¥15.0b due within 12 months, and liabilities of CN¥15.7b due beyond 12 months. Offsetting this, it had CN¥6.64b in cash and CN¥3.16b in receivables that were due within 12 months. So its liabilities total CN¥20.9b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN¥13.8b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Tangshan Jidong CementLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tangshan Jidong CementLtd's ability to maintain a healthy balance sheet going forward. 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, Tangshan Jidong CementLtd made a loss at the EBIT level, and saw its revenue drop to CN¥26b, which is a fall of 24%. To be frank that doesn't bode well.
Caveat Emptor
While Tangshan Jidong CementLtd'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 a very considerable CN¥1.8b 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. For example, we would not want to see a repeat of last year's loss of CN¥1.8b. And until that time we think this is a risky stock. 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. Be aware that Tangshan Jidong CementLtd is showing 1 warning sign in our investment analysis , you should know about...
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.