The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shenghe Resources Holding Co., Ltd (SHSE:600392) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Shenghe Resources Holding
What Is Shenghe Resources Holding's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenghe Resources Holding had CN¥3.73b of debt, an increase on CN¥3.21b, over one year. However, because it has a cash reserve of CN¥2.07b, its net debt is less, at about CN¥1.66b.
A Look At Shenghe Resources Holding's Liabilities
We can see from the most recent balance sheet that Shenghe Resources Holding had liabilities of CN¥4.98b falling due within a year, and liabilities of CN¥412.1m due beyond that. Offsetting this, it had CN¥2.07b in cash and CN¥1.60b in receivables that were due within 12 months. So its liabilities total CN¥1.72b more than the combination of its cash and short-term receivables.
Given Shenghe Resources Holding has a market capitalization of CN¥13.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenghe Resources Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Shenghe Resources Holding made a loss at the EBIT level, and saw its revenue drop to CN¥16b, which is a fall of 7.3%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Shenghe Resources Holding produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥184m. 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¥496m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shenghe Resources Holding that you should be aware of before investing here.
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.
About SHSE:600392
Shenghe Resources Holding
Engages in the research and development, production, and supply of rare earth and related products in China and internationally.
High growth potential with excellent balance sheet.