Does Yunnan Lincang Xinyuan Germanium IndustryLTD (SZSE:002428) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Yunnan Lincang Xinyuan Germanium Industry Co.,LTD (SZSE:002428) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Yunnan Lincang Xinyuan Germanium IndustryLTD

What Is Yunnan Lincang Xinyuan Germanium IndustryLTD's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Yunnan Lincang Xinyuan Germanium IndustryLTD had debt of CN¥721.8m, up from CN¥631.4m in one year. However, it does have CN¥128.8m in cash offsetting this, leading to net debt of about CN¥593.0m.

How Healthy Is Yunnan Lincang Xinyuan Germanium IndustryLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yunnan Lincang Xinyuan Germanium IndustryLTD had liabilities of CN¥727.6m due within 12 months and liabilities of CN¥463.2m due beyond that. On the other hand, it had cash of CN¥128.8m and CN¥250.9m worth of receivables due within a year. So it has liabilities totalling CN¥811.1m more than its cash and near-term receivables, combined.

Since publicly traded Yunnan Lincang Xinyuan Germanium IndustryLTD shares are worth a total of CN¥6.22b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yunnan Lincang Xinyuan Germanium IndustryLTD's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Yunnan Lincang Xinyuan Germanium IndustryLTD reported revenue of CN¥657m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Yunnan Lincang Xinyuan Germanium IndustryLTD's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥251m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Yunnan Lincang Xinyuan Germanium IndustryLTD is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.