Here's Why Sichuan HongdaLtd (SHSE:600331) Can Afford Some 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.' 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. Importantly, Sichuan Hongda Co.,Ltd (SHSE:600331) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Sichuan HongdaLtd

What Is Sichuan HongdaLtd's Debt?

The chart below, which you can click on for greater detail, shows that Sichuan HongdaLtd had CN¥710.6m in debt in March 2024; about the same as the year before. On the flip side, it has CN¥207.1m in cash leading to net debt of about CN¥503.5m.

How Strong Is Sichuan HongdaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sichuan HongdaLtd had liabilities of CN¥1.74b due within 12 months and liabilities of CN¥19.3m due beyond that. Offsetting these obligations, it had cash of CN¥207.1m as well as receivables valued at CN¥255.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.30b.

Given Sichuan HongdaLtd has a market capitalization of CN¥11.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sichuan HongdaLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Sichuan HongdaLtd had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to CN¥2.9b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Sichuan HongdaLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥49m. 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. For example, we would not want to see a repeat of last year's loss of CN¥110m. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Sichuan HongdaLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.

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