Would Shandong Longda Meishi (SZSE:002726) Be Better Off With Less Debt?

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 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. As with many other companies Shandong Longda Meishi Co., Ltd. (SZSE:002726) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shandong Longda Meishi

What Is Shandong Longda Meishi's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shandong Longda Meishi had CN¥3.04b of debt, an increase on CN¥2.64b, over one year. On the flip side, it has CN¥1.09b in cash leading to net debt of about CN¥1.95b.

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¥2.92b falling due within a year, and liabilities of CN¥1.39b due beyond that. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥471.2m due within 12 months. So it has liabilities totalling CN¥2.75b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shandong Longda Meishi is worth CN¥7.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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.

In the last year Shandong Longda Meishi had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥12b. To be frank that doesn't bode well.

Caveat Emptor

While Shandong Longda Meishi'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¥1.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥926m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shandong Longda Meishi you should be aware of.

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.