Here's Why Liaoning Cheng Da (SHSE:600739) Can Afford Some 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.' 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. We note that Liaoning Cheng Da Co., Ltd. (SHSE:600739) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Liaoning Cheng Da

What Is Liaoning Cheng Da's Net Debt?

As you can see below, at the end of March 2024, Liaoning Cheng Da had CN¥14.4b of debt, up from CN¥13.6b a year ago. Click the image for more detail. However, it does have CN¥6.79b in cash offsetting this, leading to net debt of about CN¥7.59b.

How Healthy Is Liaoning Cheng Da's Balance Sheet?

The latest balance sheet data shows that Liaoning Cheng Da had liabilities of CN¥11.9b due within a year, and liabilities of CN¥3.64b falling due after that. Offsetting this, it had CN¥6.79b in cash and CN¥1.80b in receivables that were due within 12 months. So it has liabilities totalling CN¥6.91b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Liaoning Cheng Da has a market capitalization of CN¥14.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 Cheng Da 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.

Over 12 months, Liaoning Cheng Da made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Liaoning Cheng Da'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¥112m. 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. However, it doesn't help that it burned through CN¥490m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 4 warning signs for Liaoning Cheng Da (2 make us uncomfortable!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.