Is Tangshan Jidong CementLtd (SZSE:000401) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tangshan Jidong CementLtd

What Is Tangshan Jidong CementLtd's Debt?

As you can see below, at the end of September 2023, Tangshan Jidong CementLtd had CN¥21.2b of debt, up from CN¥17.6b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥7.35b, its net debt is less, at about CN¥13.8b.

A Look At Tangshan Jidong CementLtd's Liabilities

The latest balance sheet data shows that Tangshan Jidong CementLtd had liabilities of CN¥14.4b due within a year, and liabilities of CN¥16.5b falling due after that. On the other hand, it had cash of CN¥7.35b and CN¥4.08b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥19.5b.

Given this deficit is actually higher than the company's market capitalization of CN¥14.9b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tangshan Jidong CementLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Tangshan Jidong CementLtd made a loss at the EBIT level, and saw its revenue drop to CN¥30b, which is a fall of 21%. 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). To be specific the EBIT loss came in at CN¥648m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥599m. In the meantime, we consider the stock to be risky. 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. For example, we've discovered 2 warning signs for Tangshan Jidong CementLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.