Does Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd (SHSE:600425) 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. As with many other companies Xinjiang Qingsong Building Materials and Chemicals(Group)Co,Ltd. (SHSE:600425) makes use of debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd

How Much Debt Does Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd Carry?

The chart below, which you can click on for greater detail, shows that Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd had CN¥1.66b in debt in September 2024; about the same as the year before. However, it also had CN¥1.25b in cash, and so its net debt is CN¥410.1m.

A Look At Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd's Liabilities

The latest balance sheet data shows that Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd had liabilities of CN¥1.83b due within a year, and liabilities of CN¥1.13b falling due after that. On the other hand, it had cash of CN¥1.25b and CN¥1.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥151.1m.

Given Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd has a market capitalization of CN¥6.90b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd has a low debt to EBITDA ratio of only 0.50. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. But the bad news is that Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd has seen its EBIT plunge 16% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

On our analysis Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd's interest cover should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. In particular, EBIT growth rate gives us cold feet. When we consider all the factors mentioned above, we do feel a bit cautious about Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Xinjiang Qingsong Building Materials and Chemicals(Group)CoLtd 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.