HPFLtd (SZSE:300350) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, HPF Co.,Ltd (SZSE:300350) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for HPFLtd

How Much Debt Does HPFLtd Carry?

As you can see below, HPFLtd had CN¥35.8m of debt at June 2024, down from CN¥155.5m a year prior. But it also has CN¥244.1m in cash to offset that, meaning it has CN¥208.3m net cash.

A Look At HPFLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that HPFLtd had liabilities of CN¥175.2m due within 12 months and liabilities of CN¥9.67m due beyond that. On the other hand, it had cash of CN¥244.1m and CN¥306.0m worth of receivables due within a year. So it actually has CN¥365.1m more liquid assets than total liabilities.

This surplus suggests that HPFLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HPFLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 HPFLtd 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.

In the last year HPFLtd had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥326m. To be frank that doesn't bode well.

So How Risky Is HPFLtd?

Although HPFLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥135m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 1 warning sign we've spotted with HPFLtd .

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.