Is Hainan Drinda New Energy Technology (SZSE:002865) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hainan Drinda New Energy Technology Co., Ltd. (SZSE:002865) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hainan Drinda New Energy Technology

How Much Debt Does Hainan Drinda New Energy Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Hainan Drinda New Energy Technology had debt of CN¥3.80b, up from CN¥3.03b in one year. However, it also had CN¥3.22b in cash, and so its net debt is CN¥575.7m.

A Look At Hainan Drinda New Energy Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Hainan Drinda New Energy Technology had liabilities of CN¥5.98b due within 12 months and liabilities of CN¥6.66b due beyond that. Offsetting this, it had CN¥3.22b in cash and CN¥908.3m in receivables that were due within 12 months. So its liabilities total CN¥8.51b more than the combination of its cash and short-term receivables.

Hainan Drinda New Energy Technology has a market capitalization of CN¥15.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hainan Drinda New Energy Technology 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.

Over 12 months, Hainan Drinda New Energy Technology made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hainan Drinda New Energy Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥483m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥1.2b into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hainan Drinda New Energy Technology is showing 2 warning signs in our investment analysis , 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.