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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Xining Special Steel.Co.,Ltd (SHSE:600117) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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¥3.09b of debt in September 2024, down from CN¥8.55b, one year before. However, it also had CN¥112.0m in cash, and so its net debt is CN¥2.97b.

How Strong Is Xining Special Steel.Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Xining Special Steel.Co.Ltd had liabilities of CN¥3.24b due within 12 months, and liabilities of CN¥2.66b due beyond 12 months. Offsetting this, it had CN¥112.0m in cash and CN¥971.0m in receivables that were due within 12 months. So its liabilities total CN¥4.82b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥8.01b, so it does suggest shareholders should keep an eye on Xining Special Steel.Co.Ltd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

View our latest analysis for Xining Special Steel.Co.Ltd

Over 12 months, Xining Special Steel.Co.Ltd reported revenue of CN¥5.8b, which is a gain of 49%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Xining Special Steel.Co.Ltd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥8.1m at the EBIT level. 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¥716m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Xining Special Steel.Co.Ltd .

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.