Does Xining Special Steel.Co.Ltd (SHSE:600117) Have A Healthy Balance Sheet?

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. As with many other companies Xining Special Steel.Co.,Ltd (SHSE:600117) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Xining Special Steel.Co.Ltd

What Is Xining Special Steel.Co.Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Xining Special Steel.Co.Ltd had CN¥8.55b of debt in September 2023, down from CN¥9.67b, one year before. And it doesn't have much cash, so its net debt is about the same.

A Look At Xining Special Steel.Co.Ltd's Liabilities

We can see from the most recent balance sheet that Xining Special Steel.Co.Ltd had liabilities of CN¥12.2b falling due within a year, and liabilities of CN¥1.48b due beyond that. Offsetting these obligations, it had cash of CN¥129.6m as well as receivables valued at CN¥1.34b due within 12 months. So its liabilities total CN¥12.2b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥8.72b, we think shareholders really should watch Xining Special Steel.Co.Ltd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Xining Special Steel.Co.Ltd'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, Xining Special Steel.Co.Ltd made a loss at the EBIT level, and saw its revenue drop to CN¥3.9b, which is a fall of 62%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Xining Special Steel.Co.Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥2.1b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥1.6b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. Case in point: We've spotted 2 warning signs for Xining Special Steel.Co.Ltd you should be aware of.

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.