Is Xiamen Xindeco (SZSE:000701) Weighed On By Its Debt Load?

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. Importantly, Xiamen Xindeco Ltd. (SZSE:000701) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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

See our latest analysis for Xiamen Xindeco

What Is Xiamen Xindeco's Net Debt?

As you can see below, Xiamen Xindeco had CN¥9.54b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥3.17b in cash leading to net debt of about CN¥6.37b.

How Strong Is Xiamen Xindeco's Balance Sheet?

We can see from the most recent balance sheet that Xiamen Xindeco had liabilities of CN¥13.3b falling due within a year, and liabilities of CN¥2.13b due beyond that. Offsetting these obligations, it had cash of CN¥3.17b as well as receivables valued at CN¥3.20b due within 12 months. So it has liabilities totalling CN¥9.06b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥3.85b 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. After all, Xiamen Xindeco 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 it is Xiamen Xindeco's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xiamen Xindeco had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥50b. That makes us nervous, to say the least.

Caveat Emptor

While Xiamen Xindeco's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥273m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥759m. In the meantime, we consider the stock to be risky. For riskier companies like Xiamen Xindeco I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.