Is Tangshan Jidong CementLtd (SZSE:000401) Using Debt In A Risky Way?

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.' 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. Importantly, Tangshan Jidong Cement Co.,Ltd. (SZSE:000401) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tangshan Jidong CementLtd

What Is Tangshan Jidong CementLtd's Debt?

The chart below, which you can click on for greater detail, shows that Tangshan Jidong CementLtd had CN¥22.2b in debt in March 2024; about the same as the year before. However, it does have CN¥6.64b in cash offsetting this, leading to net debt of about CN¥15.6b.

How Healthy Is Tangshan Jidong CementLtd's Balance Sheet?

The latest balance sheet data shows that Tangshan Jidong CementLtd had liabilities of CN¥15.0b due within a year, and liabilities of CN¥15.7b falling due after that. On the other hand, it had cash of CN¥6.64b and CN¥3.16b worth of receivables due within a year. So it has liabilities totalling CN¥20.9b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥11.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tangshan Jidong CementLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tangshan Jidong CementLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Tangshan Jidong CementLtd had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥26b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tangshan Jidong CementLtd'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¥1.8b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥1.8b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tangshan Jidong CementLtd .

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.