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 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 Hunan New Wellful Co.,Ltd. (SHSE:600975) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Hunan New WellfulLtd
What Is Hunan New WellfulLtd's Debt?
As you can see below, at the end of June 2023, Hunan New WellfulLtd had CN¥3.00b of debt, up from CN¥1.50b a year ago. Click the image for more detail. However, it also had CN¥2.01b in cash, and so its net debt is CN¥984.3m.
A Look At Hunan New WellfulLtd's Liabilities
The latest balance sheet data shows that Hunan New WellfulLtd had liabilities of CN¥2.75b due within a year, and liabilities of CN¥5.98b falling due after that. On the other hand, it had cash of CN¥2.01b and CN¥187.7m worth of receivables due within a year. So it has liabilities totalling CN¥6.53b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Hunan New WellfulLtd has a market capitalization of CN¥12.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hunan New WellfulLtd 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 Hunan New WellfulLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 100%, to CN¥6.0b. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
While we can certainly appreciate Hunan New WellfulLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥241m at the EBIT level. 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. However, it doesn't help that it burned through CN¥135m of cash over the last year. So to be blunt we think it is risky. 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. For instance, we've identified 1 warning sign for Hunan New WellfulLtd that you should be aware of.
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.