Is Hoyuan Green Energy (SHSE:603185) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Hoyuan Green Energy Co., Ltd. (SHSE:603185) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hoyuan Green Energy

What Is Hoyuan Green Energy's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hoyuan Green Energy had debt of CN¥2.32b, up from CN¥602.6m in one year. But it also has CN¥9.95b in cash to offset that, meaning it has CN¥7.63b net cash.

A Look At Hoyuan Green Energy's Liabilities

According to the last reported balance sheet, Hoyuan Green Energy had liabilities of CN¥17.8b due within 12 months, and liabilities of CN¥1.33b due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.95b as well as receivables valued at CN¥1.14b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.08b.

While this might seem like a lot, it is not so bad since Hoyuan Green Energy has a market capitalization of CN¥14.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Hoyuan Green Energy also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hoyuan Green Energy's ability to maintain a healthy balance sheet going forward. 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 Hoyuan Green Energy had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥7.6b. To be frank that doesn't bode well.

So How Risky Is Hoyuan Green Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Hoyuan Green Energy 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¥3.3b and booked a CN¥2.2b accounting loss. With only CN¥7.63b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Hoyuan Green Energy has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.