Is Ronglian Group (SZSE:002642) Weighed On By Its Debt Load?

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. As with many other companies Ronglian Group Ltd. (SZSE:002642) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ronglian Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ronglian Group had debt of CN¥340.3m, up from CN¥315.8m in one year. However, its balance sheet shows it holds CN¥367.0m in cash, so it actually has CN¥26.7m net cash.

A Look At Ronglian Group's Liabilities

According to the last reported balance sheet, Ronglian Group had liabilities of CN¥1.31b due within 12 months, and liabilities of CN¥18.9m due beyond 12 months. On the other hand, it had cash of CN¥367.0m and CN¥823.5m worth of receivables due within a year. So its liabilities total CN¥136.1m more than the combination of its cash and short-term receivables.

Since publicly traded Ronglian Group shares are worth a total of CN¥5.19b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ronglian Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Ronglian Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Ronglian Group

In the last year Ronglian Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥2.1b. That makes us nervous, to say the least.

So How Risky Is Ronglian Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ronglian Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥80m of cash and made a loss of CN¥314m. But the saving grace is the CN¥26.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Ronglian Group 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.