Would Liaoning Cheng Da (SHSE:600739) Be Better Off With Less 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 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 note that Liaoning Cheng Da Co., Ltd. (SHSE:600739) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Liaoning Cheng Da

What Is Liaoning Cheng Da's Debt?

As you can see below, at the end of September 2024, Liaoning Cheng Da had CN¥15.2b of debt, up from CN¥13.1b a year ago. Click the image for more detail. However, it also had CN¥7.71b in cash, and so its net debt is CN¥7.45b.

A Look At Liaoning Cheng Da's Liabilities

According to the last reported balance sheet, Liaoning Cheng Da had liabilities of CN¥11.3b due within 12 months, and liabilities of CN¥5.07b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.71b as well as receivables valued at CN¥2.06b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.59b.

Liaoning Cheng Da has a market capitalization of CN¥16.8b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Liaoning Cheng Da 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 Liaoning Cheng Da wasn't profitable at an EBIT level, but managed to grow its revenue by 8.7%, to CN¥11b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Liaoning Cheng Da had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥365m 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥23m and the profit of CN¥346m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Liaoning Cheng Da (of which 1 is a bit unpleasant!) you should know about.

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.