Yangmei ChemicalLtd (SHSE:600691) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Yangmei Chemical Co.,Ltd (SHSE:600691) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yangmei ChemicalLtd

How Much Debt Does Yangmei ChemicalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Yangmei ChemicalLtd had CN¥8.63b of debt in June 2024, down from CN¥10.2b, one year before. However, because it has a cash reserve of CN¥4.98b, its net debt is less, at about CN¥3.64b.

How Healthy Is Yangmei ChemicalLtd's Balance Sheet?

The latest balance sheet data shows that Yangmei ChemicalLtd had liabilities of CN¥14.0b due within a year, and liabilities of CN¥2.35b falling due after that. On the other hand, it had cash of CN¥4.98b and CN¥2.21b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.16b.

The deficiency here weighs heavily on the CN¥5.25b 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 definitely think shareholders need to watch this one closely. At the end of the day, Yangmei ChemicalLtd 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 ultimately the future profitability of the business will decide if Yangmei ChemicalLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Yangmei ChemicalLtd made a loss at the EBIT level, and saw its revenue drop to CN¥10b, which is a fall of 32%. To be frank that doesn't bode well.

Caveat Emptor

While Yangmei ChemicalLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥194m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥1.0b. And until that time we think this is a risky stock. For riskier companies like Yangmei ChemicalLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.