Shandong Longda Meishi (SZSE:002726) Is Carrying A Fair Bit Of Debt

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 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. Importantly, Shandong Longda Meishi Co., Ltd. (SZSE:002726) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shandong Longda Meishi

How Much Debt Does Shandong Longda Meishi Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Shandong Longda Meishi had debt of CN¥2.91b, up from CN¥2.76b in one year. However, it also had CN¥936.7m in cash, and so its net debt is CN¥1.97b.

How Strong Is Shandong Longda Meishi's Balance Sheet?

We can see from the most recent balance sheet that Shandong Longda Meishi had liabilities of CN¥2.91b falling due within a year, and liabilities of CN¥1.33b due beyond that. On the other hand, it had cash of CN¥936.7m and CN¥457.4m worth of receivables due within a year. So it has liabilities totalling CN¥2.84b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Shandong Longda Meishi has a market capitalization of CN¥7.49b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shandong Longda Meishi'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, Shandong Longda Meishi made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Shandong Longda Meishi's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥719m. 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. For example, we would not want to see a repeat of last year's loss of CN¥817m. So to be blunt we do think it is 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 Shandong Longda Meishi's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.