Is Sinochem International (SHSE:600500) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Sinochem International Corporation (SHSE:600500) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sinochem International

How Much Debt Does Sinochem International Carry?

The chart below, which you can click on for greater detail, shows that Sinochem International had CN¥20.1b in debt in March 2024; about the same as the year before. However, it also had CN¥2.30b in cash, and so its net debt is CN¥17.8b.

How Healthy Is Sinochem International's Balance Sheet?

The latest balance sheet data shows that Sinochem International had liabilities of CN¥21.3b due within a year, and liabilities of CN¥12.9b falling due after that. On the other hand, it had cash of CN¥2.30b and CN¥7.07b worth of receivables due within a year. So its liabilities total CN¥24.8b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥14.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Sinochem International 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 you can't view debt in total isolation; since Sinochem International 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 Sinochem International had a loss before interest and tax, and actually shrunk its revenue by 39%, to CN¥51b. To be frank that doesn't bode well.

Caveat Emptor

While Sinochem International's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.7b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥2.1b over the last twelve months. So suffice it to say we consider the stock to be 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. We've identified 3 warning signs with Sinochem International , and understanding them should be part of your investment process.

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.