Is Liaoning OxiranchemInc (SZSE:300082) Using Too Much 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. We can see that Liaoning Oxiranchem,Inc. (SZSE:300082) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Liaoning OxiranchemInc

What Is Liaoning OxiranchemInc's Debt?

As you can see below, Liaoning OxiranchemInc had CN¥1.63b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥286.2m, its net debt is less, at about CN¥1.34b.

How Strong Is Liaoning OxiranchemInc's Balance Sheet?

The latest balance sheet data shows that Liaoning OxiranchemInc had liabilities of CN¥2.07b due within a year, and liabilities of CN¥307.5m falling due after that. Offsetting these obligations, it had cash of CN¥286.2m as well as receivables valued at CN¥1.04b due within 12 months. So its liabilities total CN¥1.04b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Liaoning OxiranchemInc is worth CN¥3.94b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Liaoning OxiranchemInc 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.

Over 12 months, Liaoning OxiranchemInc made a loss at the EBIT level, and saw its revenue drop to CN¥3.8b, which is a fall of 9.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Liaoning OxiranchemInc produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥232m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥549m in negative free cash flow over the last twelve months. 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. Be aware that Liaoning OxiranchemInc is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.