Does Shengli Oil & Gas Pipe Holdings (HKG:1080) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shengli Oil & Gas Pipe Holdings Limited (HKG:1080) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Shengli Oil & Gas Pipe Holdings

What Is Shengli Oil & Gas Pipe Holdings's Debt?

As you can see below, Shengli Oil & Gas Pipe Holdings had CN¥325.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥49.1m in cash offsetting this, leading to net debt of about CN¥275.9m.

How Healthy Is Shengli Oil & Gas Pipe Holdings' Balance Sheet?

According to the last reported balance sheet, Shengli Oil & Gas Pipe Holdings had liabilities of CN¥397.6m due within 12 months, and liabilities of CN¥108.0m due beyond 12 months. Offsetting this, it had CN¥49.1m in cash and CN¥109.1m in receivables that were due within 12 months. So its liabilities total CN¥347.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥129.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Shengli Oil & Gas Pipe Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shengli Oil & Gas Pipe Holdings 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 Shengli Oil & Gas Pipe Holdings had a loss before interest and tax, and actually shrunk its revenue by 35%, to CN¥603m. To be frank that doesn't bode well.

Caveat Emptor

While Shengli Oil & Gas Pipe Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥62m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥65m in the last year. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shengli Oil & Gas Pipe Holdings that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.