Shandong Chenming Paper Holdings (SZSE:000488) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shandong Chenming Paper Holdings Limited (SZSE:000488) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shandong Chenming Paper Holdings

How Much Debt Does Shandong Chenming Paper Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Shandong Chenming Paper Holdings had CN¥42.1b of debt in September 2023, down from CN¥45.2b, one year before. However, it also had CN¥12.4b in cash, and so its net debt is CN¥29.8b.

A Look At Shandong Chenming Paper Holdings' Liabilities

The latest balance sheet data shows that Shandong Chenming Paper Holdings had liabilities of CN¥49.5b due within a year, and liabilities of CN¥8.77b falling due after that. Offsetting this, it had CN¥12.4b in cash and CN¥9.09b in receivables that were due within 12 months. So its liabilities total CN¥36.8b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥7.31b 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 definitely think shareholders need to watch this one closely. At the end of the day, Shandong Chenming Paper Holdings 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 Shandong Chenming Paper Holdings 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.

Over 12 months, Shandong Chenming Paper Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥26b, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Shandong Chenming Paper Holdings'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¥279m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. 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¥957m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Shandong Chenming Paper Holdings has 1 warning sign we think you should be aware of.

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.