Health Check: How Prudently Does Shaanxi Heimao Coking (SHSE:601015) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shaanxi Heimao Coking Co., Ltd. (SHSE:601015) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shaanxi Heimao Coking

What Is Shaanxi Heimao Coking's Debt?

As you can see below, at the end of September 2024, Shaanxi Heimao Coking had CN¥4.61b of debt, up from CN¥4.42b a year ago. Click the image for more detail. However, it also had CN¥1.24b in cash, and so its net debt is CN¥3.37b.

A Look At Shaanxi Heimao Coking's Liabilities

According to the last reported balance sheet, Shaanxi Heimao Coking had liabilities of CN¥8.96b due within 12 months, and liabilities of CN¥2.71b due beyond 12 months. Offsetting this, it had CN¥1.24b in cash and CN¥251.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥10.2b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥7.03b, we think shareholders really should watch Shaanxi Heimao Coking's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shaanxi Heimao Coking's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shaanxi Heimao Coking had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥16b. We would much prefer see growth.

Caveat Emptor

While Shaanxi Heimao Coking'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 a very considerable CN¥893m 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. Not least because it had negative free cash flow of CN¥597m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shaanxi Heimao Coking you should be aware of.

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.