Does Liaoning Shenhua HoldingsLtd (SHSE:600653) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Liaoning Shenhua Holdings Co.,Ltd (SHSE:600653) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Liaoning Shenhua HoldingsLtd

What Is Liaoning Shenhua HoldingsLtd's Debt?

As you can see below, Liaoning Shenhua HoldingsLtd had CN¥1.68b of debt at September 2024, down from CN¥1.81b a year prior. However, it does have CN¥214.0m in cash offsetting this, leading to net debt of about CN¥1.47b.

A Look At Liaoning Shenhua HoldingsLtd's Liabilities

The latest balance sheet data shows that Liaoning Shenhua HoldingsLtd had liabilities of CN¥1.33b due within a year, and liabilities of CN¥928.5m falling due after that. On the other hand, it had cash of CN¥214.0m and CN¥256.8m worth of receivables due within a year. So it has liabilities totalling CN¥1.79b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Liaoning Shenhua HoldingsLtd is worth CN¥4.36b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Liaoning Shenhua HoldingsLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Liaoning Shenhua HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.4b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While Liaoning Shenhua HoldingsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥35m. 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. We would feel better if it turned its trailing twelve month loss of CN¥185m into a profit. So we do think this stock is quite 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. For example, we've discovered 1 warning sign for Liaoning Shenhua HoldingsLtd that you should be aware of before investing here.

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.