Is XinJiang Ba Yi Iron & SteelLtd (SHSE:600581) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that XinJiang Ba Yi Iron & Steel Co.,Ltd. (SHSE:600581) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is XinJiang Ba Yi Iron & SteelLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that XinJiang Ba Yi Iron & SteelLtd had CN¥8.56b in debt in June 2024; about the same as the year before. However, it does have CN¥1.60b in cash offsetting this, leading to net debt of about CN¥6.96b.

A Look At XinJiang Ba Yi Iron & SteelLtd's Liabilities

The latest balance sheet data shows that XinJiang Ba Yi Iron & SteelLtd had liabilities of CN¥22.8b due within a year, and liabilities of CN¥5.15b falling due after that. Offsetting this, it had CN¥1.60b in cash and CN¥1.32b in receivables that were due within 12 months. So its liabilities total CN¥25.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥4.56b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, XinJiang Ba Yi Iron & SteelLtd would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since XinJiang Ba Yi Iron & SteelLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year XinJiang Ba Yi Iron & SteelLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months XinJiang Ba Yi Iron & SteelLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥686m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CN¥714m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. We've identified 1 warning sign with XinJiang Ba Yi Iron & SteelLtd , and understanding them should be part of your investment process.

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.