Is Shandong Hontron Aluminum Industry Holding (SZSE:002379) Weighed On By Its Debt Load?

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. 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?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for Shandong Hontron Aluminum Industry Holding

How Much Debt Does Shandong Hontron Aluminum Industry Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Shandong Hontron Aluminum Industry Holding had CN¥239.3m of debt in June 2024, down from CN¥270.2m, one year before. However, it does have CN¥839.2m in cash offsetting this, leading to net cash of CN¥599.9m.

A Look At Shandong Hontron Aluminum Industry Holding's Liabilities

The latest balance sheet data shows that Shandong Hontron Aluminum Industry Holding had liabilities of CN¥1.14b due within a year, and liabilities of CN¥120.5m falling due after that. Offsetting these obligations, it had cash of CN¥839.2m as well as receivables valued at CN¥471.6m due within 12 months. So it can boast CN¥53.8m more liquid assets than total liabilities.

This state of affairs indicates that Shandong Hontron Aluminum Industry Holding'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¥5.75b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shandong Hontron Aluminum Industry Holding has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shandong Hontron Aluminum Industry Holding 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 Shandong Hontron Aluminum Industry Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 5.3%, to CN¥3.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

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. And over the same period it saw negative free cash outflow of CN¥145m and booked a CN¥116m accounting loss. But the saving grace is the CN¥599.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 example - Shandong Hontron Aluminum Industry Holding has 1 warning sign we think 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.