Is Shanxi Meijin EnergyLtd (SZSE:000723) 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. Importantly, Shanxi Meijin Energy Co.,Ltd. (SZSE:000723) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanxi Meijin EnergyLtd

What Is Shanxi Meijin EnergyLtd's Debt?

As you can see below, at the end of September 2024, Shanxi Meijin EnergyLtd had CN¥8.73b of debt, up from CN¥5.84b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥4.68b, its net debt is less, at about CN¥4.06b.

How Healthy Is Shanxi Meijin EnergyLtd's Balance Sheet?

According to the last reported balance sheet, Shanxi Meijin EnergyLtd had liabilities of CN¥17.9b due within 12 months, and liabilities of CN¥9.50b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.68b as well as receivables valued at CN¥2.41b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥20.4b.

This deficit is considerable relative to its market capitalization of CN¥21.6b, so it does suggest shareholders should keep an eye on Shanxi Meijin EnergyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanxi Meijin EnergyLtd'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, Shanxi Meijin EnergyLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Shanxi Meijin EnergyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥672m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥2.6b in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Shanxi Meijin EnergyLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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

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.