Is LIAONING ENERGY INDUSTRYLTD (SHSE:600758) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that LIAONING ENERGY INDUSTRY Co.,LTD (SHSE:600758) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for LIAONING ENERGY INDUSTRYLTD

How Much Debt Does LIAONING ENERGY INDUSTRYLTD Carry?

You can click the graphic below for the historical numbers, but it shows that LIAONING ENERGY INDUSTRYLTD had CN¥3.83b of debt in June 2024, down from CN¥4.73b, one year before. However, because it has a cash reserve of CN¥1.96b, its net debt is less, at about CN¥1.87b.

How Healthy Is LIAONING ENERGY INDUSTRYLTD's Balance Sheet?

According to the last reported balance sheet, LIAONING ENERGY INDUSTRYLTD had liabilities of CN¥6.16b due within 12 months, and liabilities of CN¥1.31b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.96b as well as receivables valued at CN¥1.40b due within 12 months. So it has liabilities totalling CN¥4.11b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥4.01b, we think shareholders really should watch LIAONING ENERGY INDUSTRYLTD's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since LIAONING ENERGY INDUSTRYLTD 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.

Over 12 months, LIAONING ENERGY INDUSTRYLTD made a loss at the EBIT level, and saw its revenue drop to CN¥5.2b, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

While LIAONING ENERGY INDUSTRYLTD's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥23m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥220m didn't encourage us either; we'd like to see a profit. In the meantime, we 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. We've identified 1 warning sign with LIAONING ENERGY INDUSTRYLTD , and understanding them should be part of your investment process.

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.