Is Hunan New WellfulLtd (SHSE:600975) Weighed On By Its Debt Load?

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 Hunan New Wellful Co.,Ltd. (SHSE:600975) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hunan New WellfulLtd

What Is Hunan New WellfulLtd's Debt?

As you can see below, Hunan New WellfulLtd had CN¥3.03b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.21b in cash offsetting this, leading to net debt of about CN¥1.83b.

How Strong Is Hunan New WellfulLtd's Balance Sheet?

According to the last reported balance sheet, Hunan New WellfulLtd had liabilities of CN¥3.15b due within 12 months, and liabilities of CN¥6.27b due beyond 12 months. On the other hand, it had cash of CN¥1.21b and CN¥214.4m worth of receivables due within a year. So it has liabilities totalling CN¥8.01b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥8.35b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hunan New WellfulLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hunan New WellfulLtd reported revenue of CN¥6.3b, which is a gain of 5.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Hunan New WellfulLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥550m 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. Another cause for caution is that is bled CN¥339m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like Hunan New WellfulLtd 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.