Is Hunan Lead Power Technology Group (SZSE:300530) Using Too Much Debt?

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. Importantly, Hunan Lead Power Technology Group Co., Ltd. (SZSE:300530) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hunan Lead Power Technology Group

What Is Hunan Lead Power Technology Group's Net Debt?

As you can see below, at the end of September 2024, Hunan Lead Power Technology Group had CN¥497.8m of debt, up from CN¥477.6m a year ago. Click the image for more detail. On the flip side, it has CN¥282.5m in cash leading to net debt of about CN¥215.2m.

A Look At Hunan Lead Power Technology Group's Liabilities

We can see from the most recent balance sheet that Hunan Lead Power Technology Group had liabilities of CN¥957.6m falling due within a year, and liabilities of CN¥697.1m due beyond that. Offsetting this, it had CN¥282.5m in cash and CN¥171.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hunan Lead Power Technology Group has a market capitalization of CN¥4.51b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Hunan Lead Power Technology Group 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.

Over 12 months, Hunan Lead Power Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥145m, which is a fall of 50%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hunan Lead Power Technology Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥138m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥100m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Hunan Lead Power Technology Group that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.