Is Shengli Oil & Gas Pipe Holdings (HKG:1080) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shengli Oil & Gas Pipe Holdings Limited (HKG:1080) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shengli Oil & Gas Pipe Holdings

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

As you can see below, at the end of June 2023, Shengli Oil & Gas Pipe Holdings had CN¥317.8m of debt, up from CN¥283.0m a year ago. Click the image for more detail. However, it does have CN¥55.5m in cash offsetting this, leading to net debt of about CN¥262.4m.

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

The latest balance sheet data shows that Shengli Oil & Gas Pipe Holdings had liabilities of CN¥450.5m due within a year, and liabilities of CN¥95.6m falling due after that. On the other hand, it had cash of CN¥55.5m and CN¥146.6m worth of receivables due within a year. So it has liabilities totalling CN¥344.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥188.3m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Shengli Oil & Gas Pipe Holdings'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.

Over 12 months, Shengli Oil & Gas Pipe Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥926m, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Shengli Oil & Gas Pipe Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥67m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥75m in negative free cash flow over the last year. That means it's on the risky side of things. 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 instance, we've identified 4 warning signs for Shengli Oil & Gas Pipe Holdings (2 can't be ignored) you should be aware of.

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.