Xinyu Iron & Steel (SHSE:600782) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Xinyu Iron & Steel Co., Ltd (SHSE:600782) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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.

View our latest analysis for Xinyu Iron & Steel

What Is Xinyu Iron & Steel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Xinyu Iron & Steel had CN¥5.17b of debt, an increase on CN¥4.07b, over one year. However, because it has a cash reserve of CN¥3.74b, its net debt is less, at about CN¥1.43b.

A Look At Xinyu Iron & Steel's Liabilities

We can see from the most recent balance sheet that Xinyu Iron & Steel had liabilities of CN¥22.3b falling due within a year, and liabilities of CN¥3.05b due beyond that. Offsetting this, it had CN¥3.74b in cash and CN¥6.98b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥14.6b.

Given this deficit is actually higher than the company's market capitalization of CN¥12.1b, we think shareholders really should watch Xinyu Iron & Steel'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 it is future earnings, more than anything, that will determine Xinyu Iron & Steel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Xinyu Iron & Steel made a loss at the EBIT level, and saw its revenue drop to CN¥40b, which is a fall of 53%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Xinyu Iron & Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.4b. 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. Not least because it burned through CN¥1.8b in negative free cash flow over the last year. That means it's on the risky side of things. 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. To that end, you should be aware of the 1 warning sign we've spotted with Xinyu Iron & Steel .

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.