Is Hunan Kaimeite Gases (SZSE:002549) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Hunan Kaimeite Gases Co., Ltd. (SZSE:002549) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hunan Kaimeite Gases

How Much Debt Does Hunan Kaimeite Gases Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hunan Kaimeite Gases had CN¥787.8m of debt, an increase on CN¥705.3m, over one year. However, its balance sheet shows it holds CN¥1.33b in cash, so it actually has CN¥542.9m 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¥791.7m due within 12 months and liabilities of CN¥154.3m due beyond that. On the other hand, it had cash of CN¥1.33b and CN¥99.5m worth of receivables due within a year. So it actually has CN¥484.1m more liquid assets than total liabilities.

This surplus suggests that Hunan Kaimeite Gases has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hunan Kaimeite Gases 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 ultimately the future profitability of the business will decide if Hunan Kaimeite Gases can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Hunan Kaimeite Gases had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥558m. That makes us nervous, to say the least.

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¥147m and booked a CN¥90m accounting loss. With only CN¥542.9m 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hunan Kaimeite Gases is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.