Here's Why Yunnan Coal & EnergyLtd (SHSE:600792) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Yunnan Coal & Energy Co.,Ltd. (SHSE:600792) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yunnan Coal & EnergyLtd

What Is Yunnan Coal & EnergyLtd's Net Debt?

As you can see below, Yunnan Coal & EnergyLtd had CN¥1.84b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥685.1m in cash, and so its net debt is CN¥1.16b.

How Strong Is Yunnan Coal & EnergyLtd's Balance Sheet?

We can see from the most recent balance sheet that Yunnan Coal & EnergyLtd had liabilities of CN¥5.55b falling due within a year, and liabilities of CN¥1.69b due beyond that. Offsetting these obligations, it had cash of CN¥685.1m as well as receivables valued at CN¥4.18b due within 12 months. So it has liabilities totalling CN¥2.38b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥3.73b, so it does suggest shareholders should keep an eye on Yunnan Coal & EnergyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yunnan Coal & EnergyLtd'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.

Over 12 months, Yunnan Coal & EnergyLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Yunnan Coal & EnergyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥203m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥771m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Yunnan Coal & EnergyLtd is showing 4 warning signs in our investment analysis , and 3 of those are potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.