Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 can see that China Vanadium Titano-Magnetite Mining Company Limited (HKG:893) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
How Much Debt Does China Vanadium Titano-Magnetite Mining Carry?
The chart below, which you can click on for greater detail, shows that China Vanadium Titano-Magnetite Mining had CN¥114.2m in debt in June 2020; about the same as the year before. On the flip side, it has CN¥7.23m in cash leading to net debt of about CN¥107.0m.
How Strong Is China Vanadium Titano-Magnetite Mining’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China Vanadium Titano-Magnetite Mining had liabilities of CN¥291.5m due within 12 months and liabilities of CN¥27.7m due beyond that. Offsetting this, it had CN¥7.23m in cash and CN¥152.3m in receivables that were due within 12 months. So its liabilities total CN¥159.7m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CN¥204.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Vanadium Titano-Magnetite Mining’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 Vanadium Titano-Magnetite Mining made a loss at the EBIT level, and saw its revenue drop to CN¥532m, which is a fall of 11%. We would much prefer see growth.
Caveat Emptor
Not only did China Vanadium Titano-Magnetite Mining’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥21m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥79m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we’ve spotted with China Vanadium Titano-Magnetite Mining (including 1 which is doesn’t sit too well with us) .
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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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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