Does Kunming Yunnei PowerLtd (SZSE:000903) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Kunming Yunnei Power Co.,Ltd. (SZSE:000903) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kunming Yunnei PowerLtd

What Is Kunming Yunnei PowerLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Kunming Yunnei PowerLtd had debt of CN¥3.98b, up from CN¥2.25b in one year. On the flip side, it has CN¥1.55b in cash leading to net debt of about CN¥2.43b.

How Strong Is Kunming Yunnei PowerLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kunming Yunnei PowerLtd had liabilities of CN¥7.79b due within 12 months and liabilities of CN¥1.50b due beyond that. On the other hand, it had cash of CN¥1.55b and CN¥2.33b worth of receivables due within a year. So its liabilities total CN¥5.42b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥8.14b, so it does suggest shareholders should keep an eye on Kunming Yunnei PowerLtd's use of debt. 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 you can't view debt in total isolation; since Kunming Yunnei PowerLtd 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.

In the last year Kunming Yunnei PowerLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 8.3%, to CN¥5.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Kunming Yunnei PowerLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥952m at the EBIT level. 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. Another cause for caution is that is bled CN¥2.3b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 3 warning signs with Kunming Yunnei PowerLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.