The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 XinJiang Ba Yi Iron & Steel Co.,Ltd. (SHSE:600581) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 XinJiang Ba Yi Iron & SteelLtd
What Is XinJiang Ba Yi Iron & SteelLtd's Net Debt?
As you can see below, XinJiang Ba Yi Iron & SteelLtd had CN¥8.28b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥1.47b, its net debt is less, at about CN¥6.81b.
How Healthy Is XinJiang Ba Yi Iron & SteelLtd's Balance Sheet?
We can see from the most recent balance sheet that XinJiang Ba Yi Iron & SteelLtd had liabilities of CN¥23.1b falling due within a year, and liabilities of CN¥5.59b due beyond that. On the other hand, it had cash of CN¥1.47b and CN¥1.37b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥25.8b.
This deficit casts a shadow over the CN¥6.87b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, XinJiang Ba Yi Iron & SteelLtd 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 ultimately the future profitability of the business will decide if XinJiang Ba Yi Iron & SteelLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year XinJiang Ba Yi Iron & SteelLtd had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥22b. That makes us nervous, to say the least.
Caveat Emptor
Not only did XinJiang Ba Yi Iron & SteelLtd'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¥1.5b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CN¥1.5b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. For riskier companies like XinJiang Ba Yi Iron & SteelLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.