Here's Why Houpu Clean Energy Group (SZSE:300471) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Houpu Clean Energy Group Co., Ltd. (SZSE:300471) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Houpu Clean Energy Group

What Is Houpu Clean Energy Group's Debt?

The image below, which you can click on for greater detail, shows that Houpu Clean Energy Group had debt of CN¥265.3m at the end of September 2024, a reduction from CN¥292.7m over a year. On the flip side, it has CN¥232.6m in cash leading to net debt of about CN¥32.7m.

A Look At Houpu Clean Energy Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Houpu Clean Energy Group had liabilities of CN¥1.04b due within 12 months and liabilities of CN¥38.8m due beyond that. Offsetting this, it had CN¥232.6m in cash and CN¥314.5m in receivables that were due within 12 months. So its liabilities total CN¥529.5m more than the combination of its cash and short-term receivables.

Since publicly traded Houpu Clean Energy Group shares are worth a total of CN¥3.85b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Houpu Clean Energy Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Houpu Clean Energy Group 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, Houpu Clean Energy Group made a loss at the EBIT level, and saw its revenue drop to CN¥679m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did Houpu Clean Energy Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥62m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥51m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Houpu Clean Energy Group 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.