Is Hoyuan Green Energy (SHSE:603185) 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 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. Importantly, Hoyuan Green Energy Co., Ltd. (SHSE:603185) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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 Hoyuan Green Energy

How Much Debt Does Hoyuan Green Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hoyuan Green Energy had CN¥1.71b of debt, an increase on CN¥85.0m, over one year. But on the other hand it also has CN¥10.8b in cash, leading to a CN¥9.05b net cash position.

How Strong Is Hoyuan Green Energy's Balance Sheet?

The latest balance sheet data shows that Hoyuan Green Energy had liabilities of CN¥16.4b due within a year, and liabilities of CN¥1.29b falling due after that. Offsetting this, it had CN¥10.8b in cash and CN¥717.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.19b.

This deficit isn't so bad because Hoyuan Green Energy is worth CN¥10.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Hoyuan Green Energy 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Hoyuan Green Energy had a loss before interest and tax, and actually shrunk its revenue by 47%, to CN¥11b. To be frank that doesn't bode well.

So How Risky Is Hoyuan Green Energy?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Hoyuan Green Energy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥2.6b of cash and made a loss of CN¥78m. Given it only has net cash of CN¥9.05b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hoyuan Green Energy (of which 1 is a bit concerning!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com