Is Xinjiang Zhongtai Chemical (SZSE:002092) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Xinjiang Zhongtai Chemical Co., Ltd. (SZSE:002092) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xinjiang Zhongtai Chemical

How Much Debt Does Xinjiang Zhongtai Chemical Carry?

As you can see below, at the end of September 2024, Xinjiang Zhongtai Chemical had CN¥27.1b of debt, up from CN¥21.6b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥6.67b, its net debt is less, at about CN¥20.4b.

How Healthy Is Xinjiang Zhongtai Chemical's Balance Sheet?

The latest balance sheet data shows that Xinjiang Zhongtai Chemical had liabilities of CN¥35.7b due within a year, and liabilities of CN¥15.8b falling due after that. Offsetting this, it had CN¥6.67b in cash and CN¥3.99b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥40.9b.

This deficit casts a shadow over the CN¥11.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Xinjiang Zhongtai Chemical would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Xinjiang Zhongtai 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.

In the last year Xinjiang Zhongtai Chemical had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥29b. That makes us nervous, to say the least.

Caveat Emptor

While Xinjiang Zhongtai Chemical's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥135m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥2.1b 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. Case in point: We've spotted 2 warning signs for Xinjiang Zhongtai Chemical you should be aware of, and 1 of them doesn't sit too well with us.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.