Does XinJiang Ba Yi Iron & SteelLtd (SHSE:600581) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that XinJiang Ba Yi Iron & Steel Co.,Ltd. (SHSE:600581) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for XinJiang Ba Yi Iron & SteelLtd

How Much Debt Does XinJiang Ba Yi Iron & SteelLtd Carry?

You can click the graphic below for the historical numbers, but it shows that XinJiang Ba Yi Iron & SteelLtd had CN¥7.05b of debt in March 2024, down from CN¥8.28b, one year before. On the flip side, it has CN¥1.27b in cash leading to net debt of about CN¥5.77b.

How Strong Is XinJiang Ba Yi Iron & SteelLtd's Balance Sheet?

According to the last reported balance sheet, XinJiang Ba Yi Iron & SteelLtd had liabilities of CN¥24.0b due within 12 months, and liabilities of CN¥5.22b due beyond 12 months. Offsetting this, it had CN¥1.27b in cash and CN¥1.15b in receivables that were due within 12 months. So it has liabilities totalling CN¥26.8b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥4.31b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, XinJiang Ba Yi Iron & SteelLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is XinJiang Ba Yi Iron & SteelLtd'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.

In the last year XinJiang Ba Yi Iron & SteelLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 2.3%, to CN¥22b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months XinJiang Ba Yi Iron & SteelLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥648m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥325m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. Be aware that XinJiang Ba Yi Iron & SteelLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.