Is Shandong Hontron Aluminum Industry Holding (SZSE:002379) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Shandong Hontron Aluminum Industry Holding Company Limited (SZSE:002379) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shandong Hontron Aluminum Industry Holding

What Is Shandong Hontron Aluminum Industry Holding's Debt?

As you can see below, at the end of March 2024, Shandong Hontron Aluminum Industry Holding had CN¥243.5m of debt, up from CN¥170.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥491.4m in cash, so it actually has CN¥247.9m net cash.

How Healthy Is Shandong Hontron Aluminum Industry Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shandong Hontron Aluminum Industry Holding had liabilities of CN¥1.03b due within 12 months and liabilities of CN¥122.1m due beyond that. On the other hand, it had cash of CN¥491.4m and CN¥392.7m worth of receivables due within a year. So it has liabilities totalling CN¥271.2m more than its cash and near-term receivables, combined.

Of course, Shandong Hontron Aluminum Industry Holding has a market capitalization of CN¥6.53b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shandong Hontron Aluminum Industry Holding also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shandong Hontron Aluminum Industry Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shandong Hontron Aluminum Industry Holding had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥2.9b. That's not what we would hope to see.

So How Risky Is Shandong Hontron Aluminum Industry Holding?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Shandong Hontron Aluminum Industry Holding had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥285m of cash and made a loss of CN¥131m. But at least it has CN¥247.9m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 2 warning signs for Shandong Hontron Aluminum Industry Holding (1 is a bit concerning) you should be aware of.

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.