Would Sichuan HongdaLtd (SHSE:600331) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sichuan Hongda Co.,Ltd (SHSE:600331) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sichuan HongdaLtd

What Is Sichuan HongdaLtd's Debt?

The image below, which you can click on for greater detail, shows that Sichuan HongdaLtd had debt of CN¥714.7m at the end of September 2023, a reduction from CN¥748.9m over a year. However, it also had CN¥169.5m in cash, and so its net debt is CN¥545.1m.

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¥1.68b due within 12 months and liabilities of CN¥22.7m due beyond that. Offsetting these obligations, it had cash of CN¥169.5m as well as receivables valued at CN¥202.8m due within 12 months. So it has liabilities totalling CN¥1.33b more than its cash and near-term receivables, combined.

Since publicly traded Sichuan HongdaLtd shares are worth a total of CN¥11.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sichuan HongdaLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sichuan HongdaLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥3.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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¥20m. 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. We would feel better if it turned its trailing twelve month loss of CN¥105m into a profit. 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.

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.