Is Yueyang Xingchang Petro-Chemical (SZSE:000819) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Yueyang Xingchang Petro-Chemical Co., Ltd. (SZSE:000819) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yueyang Xingchang Petro-Chemical

How Much Debt Does Yueyang Xingchang Petro-Chemical Carry?

As you can see below, Yueyang Xingchang Petro-Chemical had CN¥226.4m of debt at September 2024, down from CN¥586.3m a year prior. However, its balance sheet shows it holds CN¥386.0m in cash, so it actually has CN¥159.6m net cash.

How Strong Is Yueyang Xingchang Petro-Chemical's Balance Sheet?

The latest balance sheet data shows that Yueyang Xingchang Petro-Chemical had liabilities of CN¥517.4m due within a year, and liabilities of CN¥161.4m falling due after that. On the other hand, it had cash of CN¥386.0m and CN¥130.9m worth of receivables due within a year. So it has liabilities totalling CN¥161.9m more than its cash and near-term receivables, combined.

Given Yueyang Xingchang Petro-Chemical has a market capitalization of CN¥5.70b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Yueyang Xingchang Petro-Chemical also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Yueyang Xingchang Petro-Chemical if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yueyang Xingchang Petro-Chemical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yueyang Xingchang Petro-Chemical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Yueyang Xingchang Petro-Chemical burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Yueyang Xingchang Petro-Chemical's liabilities, but we can be reassured by the fact it has has net cash of CN¥159.6m. So although we see some areas for improvement, we're not too worried about Yueyang Xingchang Petro-Chemical's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Yueyang Xingchang Petro-Chemical (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.