Would Yunnan Lincang Xinyuan Germanium IndustryLTD (SZSE:002428) Be Better Off With Less Debt?

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. As with many other companies Yunnan Lincang Xinyuan Germanium Industry Co.,LTD (SZSE:002428) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Yunnan Lincang Xinyuan Germanium IndustryLTD

What Is Yunnan Lincang Xinyuan Germanium IndustryLTD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Yunnan Lincang Xinyuan Germanium IndustryLTD had CN¥658.7m of debt, an increase on CN¥600.9m, over one year. However, because it has a cash reserve of CN¥143.1m, its net debt is less, at about CN¥515.6m.

A Look At Yunnan Lincang Xinyuan Germanium IndustryLTD's Liabilities

We can see from the most recent balance sheet that Yunnan Lincang Xinyuan Germanium IndustryLTD had liabilities of CN¥646.1m falling due within a year, and liabilities of CN¥406.4m due beyond that. On the other hand, it had cash of CN¥143.1m and CN¥238.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥670.5m.

Since publicly traded Yunnan Lincang Xinyuan Germanium IndustryLTD shares are worth a total of CN¥6.73b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yunnan Lincang Xinyuan Germanium IndustryLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Yunnan Lincang Xinyuan Germanium IndustryLTD's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Yunnan Lincang Xinyuan Germanium IndustryLTD had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥102m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥64m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Yunnan Lincang Xinyuan Germanium IndustryLTD's profit, revenue, and operating cashflow have changed over the last few years.

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.