Would Liaoning Shenhua HoldingsLtd (SHSE:600653) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Liaoning Shenhua Holdings Co.,Ltd (SHSE:600653) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Liaoning Shenhua HoldingsLtd

How Much Debt Does Liaoning Shenhua HoldingsLtd Carry?

As you can see below, Liaoning Shenhua HoldingsLtd had CN¥1.19b of debt at September 2024, down from CN¥1.81b a year prior. On the flip side, it has CN¥214.0m in cash leading to net debt of about CN¥973.3m.

How Healthy Is Liaoning Shenhua HoldingsLtd's Balance Sheet?

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. Offsetting this, it had CN¥214.0m in cash and CN¥256.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.79b.

Liaoning Shenhua HoldingsLtd has a market capitalization of CN¥4.38b, so it could very likely raise cash to ameliorate 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 you can't view debt in total isolation; since Liaoning Shenhua HoldingsLtd 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.

In the last year Liaoning Shenhua HoldingsLtd had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥4.4b. We would much prefer see growth.

Caveat Emptor

Not only did Liaoning Shenhua HoldingsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥54m. 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 to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Liaoning Shenhua HoldingsLtd .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.