Is Hunan Gold (SZSE:002155) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Hunan Gold Corporation Limited (SZSE:002155) does use debt in its business. But should shareholders be worried about its use of debt?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Hunan Gold had CN¥30.1m of debt in September 2024, down from CN¥76.9m, one year before. But on the other hand it also has CN¥805.2m in cash, leading to a CN¥775.2m net cash position.

How Healthy Is Hunan Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hunan Gold had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥228.3m due beyond that. Offsetting this, it had CN¥805.2m in cash and CN¥660.5m in receivables that were due within 12 months. So it actually has 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¥19.1b 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!

In addition to that, we're happy to report that Hunan Gold has boosted its EBIT by 84%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hunan Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hunan Gold has CN¥775.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in CN¥437m. So is Hunan Gold's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hunan Gold is showing 1 warning sign in our investment analysis , you should know about...

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.