Is Hunan New WellfulLtd (SHSE:600975) A Risky Investment?

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. We can see that Hunan New Wellful Co.,Ltd. (SHSE:600975) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hunan New WellfulLtd

What Is Hunan New WellfulLtd's Net Debt?

As you can see below, at the end of September 2023, Hunan New WellfulLtd had CN¥2.96b of debt, up from CN¥1.53b a year ago. Click the image for more detail. On the flip side, it has CN¥1.25b in cash leading to net debt of about CN¥1.71b.

A Look At Hunan New WellfulLtd's Liabilities

According to the last reported balance sheet, Hunan New WellfulLtd had liabilities of CN¥2.73b due within 12 months, and liabilities of CN¥5.80b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.25b as well as receivables valued at CN¥136.9m due within 12 months. So it has liabilities totalling CN¥7.14b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥11.7b, so it does suggest shareholders should keep an eye on Hunan New WellfulLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hunan New WellfulLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Hunan New WellfulLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to CN¥6.0b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Hunan New WellfulLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥157m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥659m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Hunan New WellfulLtd 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.