Is New Hope LiuheLtd (SZSE:000876) Weighed On By Its Debt Load?

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.' 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. As with many other companies New Hope Liuhe Co.,Ltd. (SZSE:000876) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 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?

You can click the graphic below for the historical numbers, but it shows that New Hope LiuheLtd had CN¥60.3b of debt in September 2024, down from CN¥65.4b, one year before. On the flip side, it has CN¥9.50b in cash leading to net debt of about CN¥50.8b.

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¥47.4b falling due within a year, and liabilities of CN¥37.6b due beyond that. Offsetting this, it had CN¥9.50b in cash and CN¥3.28b in receivables that were due within 12 months. So it has liabilities totalling CN¥72.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥38.9b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, New Hope LiuheLtd would likely require a major re-capitalisation if it had to pay its creditors today. 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 24%, to CN¥112b. That makes us nervous, to say the least.

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¥1.3b. 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¥4.3b and free cash flow of CN¥13b. So there is definitely a chance that it can improve things in the next few years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for New Hope LiuheLtd 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.

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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.