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

Warren Buffett famously said, '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. We can see that Tangshan Jidong Cement Co.,Ltd. (SZSE:000401) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tangshan Jidong CementLtd

How Much Debt Does Tangshan Jidong CementLtd Carry?

As you can see below, Tangshan Jidong CementLtd had CN¥21.2b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥7.01b in cash, and so its net debt is CN¥14.2b.

How Healthy Is Tangshan Jidong CementLtd's Balance Sheet?

The latest balance sheet data shows that Tangshan Jidong CementLtd had liabilities of CN¥15.5b due within a year, and liabilities of CN¥14.9b falling due after that. Offsetting this, it had CN¥7.01b in cash and CN¥3.98b in receivables that were due within 12 months. So its liabilities total CN¥19.3b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥15.6b, we think shareholders really should watch Tangshan Jidong CementLtd'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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tangshan Jidong CementLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Tangshan Jidong CementLtd had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥24b. That's not what we would hope to see.

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). To be specific the EBIT loss came in at CN¥1.2b. 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. It's fair to say the loss of CN¥1.5b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Be aware that Tangshan Jidong CementLtd is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.