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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Shandong Hontron Aluminum Industry Holding Company Limited (SZSE:002379) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shandong Hontron Aluminum Industry Holding

What Is Shandong Hontron Aluminum Industry Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shandong Hontron Aluminum Industry Holding had CN¥196.1m of debt, an increase on CN¥148.0m, over one year. However, it does have CN¥838.1m in cash offsetting this, leading to net cash of CN¥641.9m.

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¥1.24b due within 12 months and liabilities of CN¥118.9m due beyond that. Offsetting these obligations, it had cash of CN¥838.1m as well as receivables valued at CN¥666.6m due within 12 months. So it actually has CN¥144.5m more liquid assets than total liabilities.

Having regard to Shandong Hontron Aluminum Industry Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥11.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shandong Hontron Aluminum Industry Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shandong Hontron Aluminum Industry Holding 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.

Over 12 months, Shandong Hontron Aluminum Industry Holding reported revenue of CN¥3.2b, which is a gain of 20%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Shandong Hontron Aluminum Industry Holding?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥21m and booked a CN¥115m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥641.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Shandong Hontron Aluminum Industry Holding may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. 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.