Xinming China Holdings (HKG:2699) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Xinming China Holdings Limited (HKG:2699) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Xinming China Holdings

What Is Xinming China Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Xinming China Holdings had CN¥1.81b of debt in December 2021, down from CN¥2.23b, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Xinming China Holdings' Balance Sheet?

We can see from the most recent balance sheet that Xinming China Holdings had liabilities of CN¥4.72b falling due within a year, and liabilities of CN¥478.5m due beyond that. Offsetting this, it had CN¥20.2m in cash and CN¥33.5m in receivables that were due within 12 months. So its liabilities total CN¥5.15b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥51.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Xinming China 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 you can't view debt in total isolation; since Xinming China Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xinming China Holdings had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥102m. That makes us nervous, to say the least.

Caveat Emptor

While Xinming China 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¥405m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥864m in the last year. So we think buying this stock is risky. 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. Be aware that Xinming China Holdings is showing 3 warning signs in our investment analysis , and 2 of those are 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.