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. Importantly, Houpu Clean Energy Group Co., Ltd. (SZSE:300471) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Houpu Clean Energy Group
What Is Houpu Clean Energy Group's Net Debt?
As you can see below, Houpu Clean Energy Group had CN¥292.7m of debt at September 2023, down from CN¥329.5m a year prior. However, because it has a cash reserve of CN¥270.1m, its net debt is less, at about CN¥22.6m.
A Look At Houpu Clean Energy Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Houpu Clean Energy Group had liabilities of CN¥969.3m due within 12 months and liabilities of CN¥111.8m due beyond that. Offsetting this, it had CN¥270.1m in cash and CN¥303.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥507.2m more than its cash and near-term receivables, combined.
Given Houpu Clean Energy Group has a market capitalization of CN¥5.57b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Houpu Clean Energy Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Houpu Clean Energy 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.
Over 12 months, Houpu Clean Energy Group reported revenue of CN¥843m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Houpu Clean Energy Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥85m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥99m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Houpu Clean Energy Group is showing 1 warning sign in our investment analysis , 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.