Is Hunan Huamin Holdings (SZSE:300345) Using Debt In A Risky Way?

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. We note that Hunan Huamin Holdings Co., Ltd. (SZSE:300345) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Hunan Huamin Holdings

What Is Hunan Huamin Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hunan Huamin Holdings had CN¥121.1m of debt, an increase on none, over one year. But on the other hand it also has CN¥253.3m in cash, leading to a CN¥132.3m net cash position.

A Look At Hunan Huamin Holdings' Liabilities

The latest balance sheet data shows that Hunan Huamin Holdings had liabilities of CN¥970.1m due within a year, and liabilities of CN¥411.0m falling due after that. Offsetting these obligations, it had cash of CN¥253.3m as well as receivables valued at CN¥423.9m due within 12 months. So its liabilities total CN¥703.8m more than the combination of its cash and short-term receivables.

Of course, Hunan Huamin Holdings has a market capitalization of CN¥4.51b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hunan Huamin Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hunan Huamin Holdings 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 Hunan Huamin Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 289%, to CN¥917m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Hunan Huamin Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Hunan Huamin Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥669m and booked a CN¥156m accounting loss. Given it only has net cash of CN¥132.3m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Hunan Huamin Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hunan Huamin Holdings .

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.