Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Xinjiang Tianye Co.,Ltd. (SHSE:600075) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Xinjiang TianyeLtd
What Is Xinjiang TianyeLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Xinjiang TianyeLtd had CN¥8.93b of debt, an increase on CN¥5.58b, over one year. However, it also had CN¥3.66b in cash, and so its net debt is CN¥5.27b.
A Look At Xinjiang TianyeLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Xinjiang TianyeLtd had liabilities of CN¥5.10b due within 12 months and liabilities of CN¥7.24b due beyond that. Offsetting these obligations, it had cash of CN¥3.66b as well as receivables valued at CN¥1.59b due within 12 months. So its liabilities total CN¥7.09b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CN¥8.37b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Xinjiang TianyeLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Xinjiang TianyeLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to CN¥9.6b. To be frank that doesn't bode well.
Caveat Emptor
Not only did Xinjiang TianyeLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥394m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥723m into a profit. In the meantime, we consider the stock very risky. 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 Xinjiang TianyeLtd has 2 warning signs (and 1 which is potentially serious) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.