Is Sinosteel Luonai Materials Technology (SHSE:688119) Weighed On By Its Debt Load?

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. Importantly, Sinosteel Luonai Materials Technology Co., Ltd. (SHSE:688119) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sinosteel Luonai Materials Technology

What Is Sinosteel Luonai Materials Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sinosteel Luonai Materials Technology had CN¥500.0m of debt in September 2024, down from CN¥753.2m, one year before. However, it does have CN¥1.53b in cash offsetting this, leading to net cash of CN¥1.03b.

How Healthy Is Sinosteel Luonai Materials Technology's Balance Sheet?

We can see from the most recent balance sheet that Sinosteel Luonai Materials Technology had liabilities of CN¥1.44b falling due within a year, and liabilities of CN¥713.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥1.55b due within 12 months. So it actually has CN¥933.3m more liquid assets than total liabilities.

This excess liquidity suggests that Sinosteel Luonai Materials Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sinosteel Luonai Materials Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Sinosteel Luonai Materials Technology'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.

Over 12 months, Sinosteel Luonai Materials Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is Sinosteel Luonai Materials Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sinosteel Luonai Materials Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥232m of cash and made a loss of CN¥16m. Given it only has net cash of CN¥1.03b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Sinosteel Luonai Materials Technology is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.