China Metal Resources Utilization (HKG:1636) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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. Importantly, China Metal Resources Utilization Limited (HKG:1636) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Metal Resources Utilization

How Much Debt Does China Metal Resources Utilization Carry?

As you can see below, China Metal Resources Utilization had CN¥1.43b of debt at June 2022, down from CN¥1.85b a year prior. And it doesn't have much cash, so its net debt is about the same.

How Strong Is China Metal Resources Utilization's Balance Sheet?

We can see from the most recent balance sheet that China Metal Resources Utilization had liabilities of CN¥5.10b falling due within a year, and liabilities of CN¥5.30m due beyond that. On the other hand, it had cash of CN¥7.03m and CN¥1.49b worth of receivables due within a year. So it has liabilities totalling CN¥3.60b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥385.5m 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 definitely think shareholders need to watch this one closely. At the end of the day, China Metal Resources Utilization would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Metal Resources Utilization 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 China Metal Resources Utilization had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥5.5b. To be frank that doesn't bode well.

Caveat Emptor

Not only did China Metal Resources Utilization's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥230m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥547m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for China Metal Resources Utilization you should be aware of, and 1 of them is a bit unpleasant.

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.