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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies New Hope Liuhe Co.,Ltd. (SZSE:000876) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for New Hope LiuheLtd

What Is New Hope LiuheLtd's Debt?

As you can see below, New Hope LiuheLtd had CN¥61.4b of debt at June 2024, down from CN¥67.7b a year prior. However, because it has a cash reserve of CN¥10.8b, its net debt is less, at about CN¥50.6b.

How Healthy Is New Hope LiuheLtd's Balance Sheet?

We can see from the most recent balance sheet that New Hope LiuheLtd had liabilities of CN¥52.4b falling due within a year, and liabilities of CN¥38.1b due beyond that. Offsetting this, it had CN¥10.8b in cash and CN¥4.22b in receivables that were due within 12 months. So its liabilities total CN¥75.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥47.0b company, like a colossus towering over mere mortals. 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. 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 New Hope LiuheLtd 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.

In the last year New Hope LiuheLtd had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥122b. That's not what we would hope to see.

Caveat Emptor

While New Hope LiuheLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥2.9b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of CN¥2.0b and free cash flow of CN¥14b. So there is definitely a chance that it can improve things in the next few years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for New Hope LiuheLtd you should know about.

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.

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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.