We Think Hunan Corun New Energy (SHSE:600478) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Hunan Corun New Energy Co., Ltd. (SHSE:600478) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Hunan Corun New Energy

What Is Hunan Corun New Energy's Net Debt?

As you can see below, Hunan Corun New Energy had CN¥3.19b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.81b in cash offsetting this, leading to net debt of about CN¥1.38b.

A Look At Hunan Corun New Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Hunan Corun New Energy had liabilities of CN¥4.03b due within 12 months and liabilities of CN¥1.97b due beyond that. Offsetting this, it had CN¥1.81b in cash and CN¥597.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.59b.

Hunan Corun New Energy has a market capitalization of CN¥7.61b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hunan Corun New Energy will need earnings to service that debt. 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, Hunan Corun New Energy made a loss at the EBIT level, and saw its revenue drop to CN¥3.8b, which is a fall of 3.0%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Hunan Corun New Energy produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥5.8m. 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¥73m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Hunan Corun New Energy you should be aware of.

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.