Hunan Gold (SZSE:002155) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hunan Gold Corporation Limited (SZSE:002155) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hunan Gold

What Is Hunan Gold's Net Debt?

As you can see below, Hunan Gold had CN¥30.1m of debt at September 2024, down from CN¥76.9m a year prior. However, its balance sheet shows it holds CN¥805.2m in cash, so it actually has CN¥775.2m net cash.

How Strong Is Hunan Gold's Balance Sheet?

We can see from the most recent balance sheet that Hunan Gold had liabilities of CN¥1.06b falling due within a year, and liabilities of CN¥228.3m due beyond that. Offsetting these obligations, it had cash of CN¥805.2m as well as receivables valued at CN¥660.5m due within 12 months. So it can boast CN¥182.3m more liquid assets than total liabilities.

This state of affairs indicates that Hunan Gold's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥20.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hunan Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hunan Gold grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hunan Gold 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hunan Gold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Hunan Gold recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hunan Gold has net cash of CN¥775.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥437m, being 81% of its EBIT. So we don't think Hunan Gold's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Hunan Gold , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.