Chengxin Lithium Group (SZSE:002240) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Chengxin Lithium Group Co., Ltd. (SZSE:002240) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chengxin Lithium Group

What Is Chengxin Lithium Group's Debt?

As you can see below, at the end of June 2024, Chengxin Lithium Group had CN¥7.23b of debt, up from CN¥5.54b a year ago. Click the image for more detail. However, it also had CN¥2.63b in cash, and so its net debt is CN¥4.61b.

How Healthy Is Chengxin Lithium Group's Balance Sheet?

According to the last reported balance sheet, Chengxin Lithium Group had liabilities of CN¥7.12b due within 12 months, and liabilities of CN¥2.00b due beyond 12 months. Offsetting this, it had CN¥2.63b in cash and CN¥966.8m in receivables that were due within 12 months. So its liabilities total CN¥5.53b more than the combination of its cash and short-term receivables.

Chengxin Lithium Group has a market capitalization of CN¥13.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chengxin Lithium Group 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.

In the last year Chengxin Lithium Group had a loss before interest and tax, and actually shrunk its revenue by 51%, to CN¥5.8b. That makes us nervous, to say the least.

Caveat Emptor

While Chengxin Lithium Group'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¥661m. 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. However, it doesn't help that it burned through CN¥2.8b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Chengxin Lithium Group .

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.