Would Kunming Yunnei PowerLtd (SZSE:000903) Be Better Off With Less Debt?

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 can see that Kunming Yunnei Power Co.,Ltd. (SZSE:000903) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Kunming Yunnei PowerLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Kunming Yunnei PowerLtd had CN¥3.98b of debt, an increase on CN¥2.25b, over one year. However, because it has a cash reserve of CN¥1.55b, its net debt is less, at about CN¥2.43b.

How Healthy Is Kunming Yunnei PowerLtd's Balance Sheet?

According to the last reported balance sheet, Kunming Yunnei PowerLtd had liabilities of CN¥7.79b due within 12 months, and liabilities of CN¥1.50b due beyond 12 months. 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¥7.12b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kunming Yunnei PowerLtd 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.

Check out our latest analysis for Kunming Yunnei PowerLtd

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. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Kunming Yunnei PowerLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥952m 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¥2.3b of cash over the last year. So in short it's a really risky stock. 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 example, we've discovered 3 warning signs for Kunming Yunnei PowerLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.