Is China First Heavy Industries (SHSE:601106) Weighed On By Its Debt Load?

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.' 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. We note that China First Heavy Industries (SHSE:601106) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China First Heavy Industries

How Much Debt Does China First Heavy Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 China First Heavy Industries had CN¥21.0b of debt, an increase on CN¥18.9b, over one year. On the flip side, it has CN¥2.46b in cash leading to net debt of about CN¥18.5b.

A Look At China First Heavy Industries' Liabilities

The latest balance sheet data shows that China First Heavy Industries had liabilities of CN¥18.9b due within a year, and liabilities of CN¥13.6b falling due after that. Offsetting this, it had CN¥2.46b in cash and CN¥14.4b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥15.6b.

This deficit is considerable relative to its market capitalization of CN¥15.7b, so it does suggest shareholders should keep an eye on China First Heavy Industries' use of debt. 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 ultimately the future profitability of the business will decide if China First Heavy Industries 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.

Over 12 months, China First Heavy Industries made a loss at the EBIT level, and saw its revenue drop to CN¥16b, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

While China First Heavy Industries'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¥1.9b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥3.5m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how China First Heavy Industries's profit, revenue, and operating cashflow have changed over the last few years.

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.