Is Hunan Kaimeite Gases (SZSE:002549) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Hunan Kaimeite Gases Co., Ltd. (SZSE:002549) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hunan Kaimeite Gases

What Is Hunan Kaimeite Gases's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hunan Kaimeite Gases had CN¥867.2m of debt, an increase on CN¥811.7m, over one year. But it also has CN¥1.70b in cash to offset that, meaning it has CN¥830.2m net cash.

How Strong Is Hunan Kaimeite Gases' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hunan Kaimeite Gases had liabilities of CN¥991.6m due within 12 months and liabilities of CN¥166.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.70b as well as receivables valued at CN¥81.2m due within 12 months. So it actually has CN¥620.2m more liquid assets than total liabilities.

It's good to see that Hunan Kaimeite Gases has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hunan Kaimeite Gases 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 ultimately the future profitability of the business will decide if Hunan Kaimeite Gases can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hunan Kaimeite Gases made a loss at the EBIT level, and saw its revenue drop to CN¥575m, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Hunan Kaimeite Gases?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hunan Kaimeite Gases lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥110m of cash and made a loss of CN¥92m. Given it only has net cash of CN¥830.2m, the company may need to raise more capital if it doesn't reach break-even soon. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hunan Kaimeite Gases .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.