Is Zhejiang Huatong Meat Products (SZSE:002840) Using Debt In A Risky Way?

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. We note that Zhejiang Huatong Meat Products Co., Ltd. (SZSE:002840) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Zhejiang Huatong Meat Products

What Is Zhejiang Huatong Meat Products's Net Debt?

As you can see below, at the end of June 2024, Zhejiang Huatong Meat Products had CN¥4.95b of debt, up from CN¥4.56b a year ago. Click the image for more detail. However, it does have CN¥655.9m in cash offsetting this, leading to net debt of about CN¥4.29b.

A Look At Zhejiang Huatong Meat Products' Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Huatong Meat Products had liabilities of CN¥3.60b due within 12 months and liabilities of CN¥3.30b due beyond that. Offsetting this, it had CN¥655.9m in cash and CN¥107.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.14b.

This deficit is considerable relative to its market capitalization of CN¥6.92b, so it does suggest shareholders should keep an eye on Zhejiang Huatong Meat Products' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Zhejiang Huatong Meat Products can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Zhejiang Huatong Meat Products had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥8.6b. That's not what we would hope to see.

Caveat Emptor

Not only did Zhejiang Huatong Meat Products's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥181m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥416m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Zhejiang Huatong Meat Products 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.