We Think Xining Special Steel.Co.Ltd (SHSE:600117) Has A Fair Chunk Of 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.' 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. As with many other companies Xining Special Steel.Co.,Ltd (SHSE:600117) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

You can click the graphic below for the historical numbers, but it shows that Xining Special Steel.Co.Ltd had CN¥3.13b of debt in March 2024, down from CN¥9.57b, one year before. However, it does have CN¥160.4m in cash offsetting this, leading to net debt of about CN¥2.97b.

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

Zooming in on the latest balance sheet data, we can see that Xining Special Steel.Co.Ltd had liabilities of CN¥3.03b due within 12 months and liabilities of CN¥2.90b due beyond that. Offsetting this, it had CN¥160.4m in cash and CN¥1.07b in receivables that were due within 12 months. So it has liabilities totalling CN¥4.69b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥6.77b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xining Special Steel.Co.Ltd will need earnings to service that debt. 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¥4.8b, which is a fall of 21%. 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). Its EBIT loss was a whopping CN¥1.1b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥851m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for Xining Special Steel.Co.Ltd that you should be aware of.

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.