Does Hunan Changyuan LicoLtd (SHSE:688779) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Changyuan Lico Co.,Ltd. (SHSE:688779) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hunan Changyuan LicoLtd

What Is Hunan Changyuan LicoLtd's Debt?

The chart below, which you can click on for greater detail, shows that Hunan Changyuan LicoLtd had CN¥3.65b in debt in March 2024; about the same as the year before. However, it also had CN¥2.52b in cash, and so its net debt is CN¥1.13b.

A Look At Hunan Changyuan LicoLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Hunan Changyuan LicoLtd had liabilities of CN¥2.65b due within 12 months and liabilities of CN¥3.34b due beyond that. Offsetting this, it had CN¥2.52b in cash and CN¥4.16b in receivables that were due within 12 months. So it can boast CN¥688.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Hunan Changyuan LicoLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hunan Changyuan LicoLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hunan Changyuan LicoLtd made a loss at the EBIT level, and saw its revenue drop to CN¥9.9b, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While Hunan Changyuan LicoLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥173m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. For riskier companies like Hunan Changyuan LicoLtd 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.

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