Does Xinyang Maojian Group (HKG:362) Have A Healthy Balance Sheet?

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.' 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. We note that Xinyang Maojian Group Limited (HKG:362) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Xinyang Maojian Group

What Is Xinyang Maojian Group's Net Debt?

As you can see below, at the end of December 2020, Xinyang Maojian Group had HK$1.21b of debt, up from HK$1.04b a year ago. Click the image for more detail. However, it also had HK$40.7m in cash, and so its net debt is HK$1.17b.

How Healthy Is Xinyang Maojian Group's Balance Sheet?

We can see from the most recent balance sheet that Xinyang Maojian Group had liabilities of HK$486.8m falling due within a year, and liabilities of HK$1.23b due beyond that. On the other hand, it had cash of HK$40.7m and HK$88.3m worth of receivables due within a year. So its liabilities total HK$1.59b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$473.7m 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, Xinyang Maojian Group 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 Xinyang Maojian Group 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 Xinyang Maojian Group had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to HK$268m. We would much prefer see growth.

Caveat Emptor

Importantly, Xinyang Maojian Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$211m. 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. But we think that is unlikely, given it is low on liquid assets, and burned through HK$106m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Xinyang Maojian Group (2 can't be ignored!) that you should be aware of before investing here.

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. 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.
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