Is Xining Special Steel.Co.Ltd (SHSE:600117) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

As you can see below, Xining Special Steel.Co.Ltd had CN¥3.09b of debt at September 2024, down from CN¥8.55b a year prior. However, because it has a cash reserve of CN¥112.0m, its net debt is less, at about CN¥2.97b.

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

We can see from the most recent balance sheet that Xining Special Steel.Co.Ltd had liabilities of CN¥3.24b falling due within a year, and liabilities of CN¥2.66b due beyond that. Offsetting these obligations, it had cash of CN¥112.0m as well as receivables valued at CN¥971.0m due within 12 months. So it has liabilities totalling CN¥4.82b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Xining Special Steel.Co.Ltd is worth CN¥9.24b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xining Special Steel.Co.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. To be specific the EBIT loss came in at CN¥8.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. 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. 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 example, we've discovered 2 warning signs for Xining Special Steel.Co.Ltd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.