Is Jiangsu ChengXing Phosph-Chemicals (SHSE:600078) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Jiangsu ChengXing Phosph-Chemicals Co., Ltd. (SHSE:600078) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu ChengXing Phosph-Chemicals

What Is Jiangsu ChengXing Phosph-Chemicals's Debt?

As you can see below, Jiangsu ChengXing Phosph-Chemicals had CN¥1.56b of debt at March 2024, down from CN¥1.74b a year prior. However, it also had CN¥586.1m in cash, and so its net debt is CN¥974.5m.

How Healthy Is Jiangsu ChengXing Phosph-Chemicals' Balance Sheet?

The latest balance sheet data shows that Jiangsu ChengXing Phosph-Chemicals had liabilities of CN¥1.65b due within a year, and liabilities of CN¥1.52b falling due after that. Offsetting this, it had CN¥586.1m in cash and CN¥820.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.76b.

This deficit isn't so bad because Jiangsu ChengXing Phosph-Chemicals is worth CN¥4.77b, 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 Jiangsu ChengXing Phosph-Chemicals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jiangsu ChengXing Phosph-Chemicals made a loss at the EBIT level, and saw its revenue drop to CN¥3.0b, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

While Jiangsu ChengXing Phosph-Chemicals'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¥19m. 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. For example, we would not want to see a repeat of last year's loss of CN¥88m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Jiangsu ChengXing Phosph-Chemicals that you should be aware of.

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.