Is China Shanshui Cement Group (HKG:691) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 China Shanshui Cement Group Limited (HKG:691) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Shanshui Cement Group

What Is China Shanshui Cement Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Shanshui Cement Group had CN¥5.52b of debt in June 2024, down from CN¥6.20b, one year before. On the flip side, it has CN¥3.04b in cash leading to net debt of about CN¥2.49b.

How Strong Is China Shanshui Cement Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Shanshui Cement Group had liabilities of CN¥10.7b due within 12 months and liabilities of CN¥2.52b due beyond that. Offsetting these obligations, it had cash of CN¥3.04b as well as receivables valued at CN¥2.93b due within 12 months. So its liabilities total CN¥7.26b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥1.92b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, China Shanshui Cement Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is China Shanshui Cement Group's earnings that will influence how the balance sheet holds up in the future. 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, China Shanshui Cement Group made a loss at the EBIT level, and saw its revenue drop to CN¥16b, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

While China Shanshui Cement Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥288m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CN¥920m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - China Shanshui Cement Group has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.