Yunnan Lincang Xinyuan Germanium IndustryLTD (SZSE:002428) Is Making Moderate Use Of Debt

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 can see that Yunnan Lincang Xinyuan Germanium Industry Co.,LTD (SZSE:002428) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yunnan Lincang Xinyuan Germanium IndustryLTD

How Much Debt Does Yunnan Lincang Xinyuan Germanium IndustryLTD Carry?

The chart below, which you can click on for greater detail, shows that Yunnan Lincang Xinyuan Germanium IndustryLTD had CN¥693.6m in debt in June 2024; about the same as the year before. However, it does have CN¥131.7m in cash offsetting this, leading to net debt of about CN¥561.9m.

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

The latest balance sheet data shows that Yunnan Lincang Xinyuan Germanium IndustryLTD had liabilities of CN¥708.5m due within a year, and liabilities of CN¥526.4m falling due after that. Offsetting this, it had CN¥131.7m in cash and CN¥353.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥749.8m.

Since publicly traded Yunnan Lincang Xinyuan Germanium IndustryLTD shares are worth a total of CN¥9.08b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Yunnan Lincang Xinyuan Germanium IndustryLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to CN¥738m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Yunnan Lincang Xinyuan Germanium IndustryLTD still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥31m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥233m of cash over the last year. So suffice it to say we do 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. Be aware that Yunnan Lincang Xinyuan Germanium IndustryLTD is showing 2 warning signs in our investment analysis , you should know about...

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.