Leshan Giantstar Farming&Husbandry (SHSE:603477) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Leshan Giantstar Farming&Husbandry Corporation Limited (SHSE:603477) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Leshan Giantstar Farming&Husbandry

What Is Leshan Giantstar Farming&Husbandry's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Leshan Giantstar Farming&Husbandry had debt of CN¥2.77b, up from CN¥2.14b in one year. However, because it has a cash reserve of CN¥445.8m, its net debt is less, at about CN¥2.32b.

A Look At Leshan Giantstar Farming&Husbandry's Liabilities

We can see from the most recent balance sheet that Leshan Giantstar Farming&Husbandry had liabilities of CN¥2.78b falling due within a year, and liabilities of CN¥1.85b due beyond that. On the other hand, it had cash of CN¥445.8m and CN¥58.0m worth of receivables due within a year. So it has liabilities totalling CN¥4.12b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Leshan Giantstar Farming&Husbandry has a market capitalization of CN¥17.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Leshan Giantstar Farming&Husbandry'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, Leshan Giantstar Farming&Husbandry saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Leshan Giantstar Farming&Husbandry produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥398m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥1.1b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Leshan Giantstar Farming&Husbandry you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.