Health Check: How Prudently Does Shandong Chenming Paper Holdings (SZSE:000488) 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.' 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, Shandong Chenming Paper Holdings Limited (SZSE:000488) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shandong Chenming Paper Holdings

How Much Debt Does Shandong Chenming Paper Holdings Carry?

As you can see below, Shandong Chenming Paper Holdings had CN¥42.4b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥13.3b in cash leading to net debt of about CN¥29.1b.

How Healthy Is Shandong Chenming Paper Holdings' Balance Sheet?

According to the last reported balance sheet, Shandong Chenming Paper Holdings had liabilities of CN¥50.9b due within 12 months, and liabilities of CN¥8.38b due beyond 12 months. Offsetting this, it had CN¥13.3b in cash and CN¥9.34b in receivables that were due within 12 months. So it has liabilities totalling CN¥36.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥7.52b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Shandong Chenming Paper Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shandong Chenming Paper Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shandong Chenming Paper Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥27b, which is a fall of 8.2%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shandong Chenming Paper Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥26m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥1.0b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. 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 Shandong Chenming Paper Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com