Is Sichuan Qiaoyuan GasLtd (SZSE:301286) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sichuan Qiaoyuan Gas Co.,Ltd. (SZSE:301286) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sichuan Qiaoyuan GasLtd

How Much Debt Does Sichuan Qiaoyuan GasLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Sichuan Qiaoyuan GasLtd had debt of CN¥93.2m, up from CN¥12.2m in one year. However, it does have CN¥180.2m in cash offsetting this, leading to net cash of CN¥87.0m.

How Healthy Is Sichuan Qiaoyuan GasLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sichuan Qiaoyuan GasLtd had liabilities of CN¥129.1m due within 12 months and liabilities of CN¥105.0m due beyond that. Offsetting this, it had CN¥180.2m in cash and CN¥256.1m in receivables that were due within 12 months. So it actually has CN¥202.1m more liquid assets than total liabilities.

This state of affairs indicates that Sichuan Qiaoyuan GasLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥12.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Sichuan Qiaoyuan GasLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Sichuan Qiaoyuan GasLtd saw its EBIT decline by 6.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sichuan Qiaoyuan GasLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sichuan Qiaoyuan GasLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Sichuan Qiaoyuan GasLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sichuan Qiaoyuan GasLtd has net cash of CN¥87.0m, as well as more liquid assets than liabilities. So we are not troubled with Sichuan Qiaoyuan GasLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Sichuan Qiaoyuan GasLtd has 1 warning sign we think you should be aware of.

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.