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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Hunan New Wellful Co.,Ltd. (SHSE:600975) does use debt in its business. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hunan New WellfulLtd

What Is Hunan New WellfulLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hunan New WellfulLtd had CN¥3.11b of debt, an increase on CN¥2.90b, over one year. However, because it has a cash reserve of CN¥979.1m, its net debt is less, at about CN¥2.13b.

A Look At Hunan New WellfulLtd's Liabilities

We can see from the most recent balance sheet that Hunan New WellfulLtd had liabilities of CN¥3.17b falling due within a year, and liabilities of CN¥6.03b due beyond that. Offsetting this, it had CN¥979.1m in cash and CN¥133.0m in receivables that were due within 12 months. So its liabilities total CN¥8.09b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥11.9b. 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 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.

Over 12 months, Hunan New WellfulLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Hunan New WellfulLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥974m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥757m in negative free cash flow over the last twelve months. 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. Case in point: We've spotted 1 warning sign for Hunan New WellfulLtd you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.