Is Shaanxi Xinghua ChemistryLtd (SZSE:002109) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Shaanxi Xinghua Chemistry Co.,Ltd (SZSE:002109) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shaanxi Xinghua ChemistryLtd

What Is Shaanxi Xinghua ChemistryLtd's Debt?

As you can see below, Shaanxi Xinghua ChemistryLtd had CN¥4.25b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.51b in cash offsetting this, leading to net debt of about CN¥2.74b.

A Look At Shaanxi Xinghua ChemistryLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Shaanxi Xinghua ChemistryLtd had liabilities of CN¥2.24b due within 12 months and liabilities of CN¥3.88b due beyond that. Offsetting this, it had CN¥1.51b in cash and CN¥10.6m in receivables that were due within 12 months. So its liabilities total CN¥4.59b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥4.22b, we think shareholders really should watch Shaanxi Xinghua ChemistryLtd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Shaanxi Xinghua ChemistryLtd'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.

Over 12 months, Shaanxi Xinghua ChemistryLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Shaanxi Xinghua ChemistryLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥552m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥524m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Shaanxi Xinghua ChemistryLtd you should be aware of, and 2 of them are a bit concerning.

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.

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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.