Is New Hope LiuheLtd (SZSE:000876) Using Too Much Debt?

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.' 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 New Hope Liuhe Co.,Ltd. (SZSE:000876) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for New Hope LiuheLtd

What Is New Hope LiuheLtd's Debt?

The image below, which you can click on for greater detail, shows that New Hope LiuheLtd had debt of CN¥62.5b at the end of March 2024, a reduction from CN¥68.9b over a year. However, it also had CN¥10.9b in cash, and so its net debt is CN¥51.5b.

How Healthy Is New Hope LiuheLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that New Hope LiuheLtd had liabilities of CN¥53.7b due within 12 months and liabilities of CN¥40.1b due beyond that. On the other hand, it had cash of CN¥10.9b and CN¥4.72b worth of receivables due within a year. So it has liabilities totalling CN¥78.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥46.2b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, New Hope LiuheLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine New Hope LiuheLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year New Hope LiuheLtd had a loss before interest and tax, and actually shrunk its revenue by 9.7%, to CN¥132b. We would much prefer see growth.

Caveat Emptor

Importantly, New Hope LiuheLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥5.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of CN¥522k and free cash flow of CN¥13b. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with New Hope LiuheLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.