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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hunan Kaimeite Gases Co., Ltd. (SZSE:002549) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt 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 September 2024 Hunan Kaimeite Gases had CN¥777.7m of debt, an increase on CN¥637.0m, over one year. However, it does have CN¥1.25b in cash offsetting this, leading to net cash of CN¥473.9m.

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¥794.0m due within 12 months and liabilities of CN¥153.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.25b as well as receivables valued at CN¥68.0m due within 12 months. So it can boast CN¥372.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Hunan Kaimeite Gases could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Hunan Kaimeite Gases had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥581m. That's not what we would hope to see.

So How Risky Is Hunan Kaimeite Gases?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Hunan Kaimeite Gases 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¥196m and booked a CN¥44m accounting loss. With only CN¥473.9m on the balance sheet, it would appear that its going to need to raise capital again 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. For riskier companies like Hunan Kaimeite Gases I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.