Is DaTang HuaYin Electric PowerLTD (SHSE:600744) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that DaTang HuaYin Electric Power CO.,LTD (SHSE:600744) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for DaTang HuaYin Electric PowerLTD

How Much Debt Does DaTang HuaYin Electric PowerLTD Carry?

As you can see below, at the end of September 2023, DaTang HuaYin Electric PowerLTD had CN¥17.6b of debt, up from CN¥15.9b a year ago. Click the image for more detail. However, it also had CN¥699.1m in cash, and so its net debt is CN¥16.9b.

How Healthy Is DaTang HuaYin Electric PowerLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DaTang HuaYin Electric PowerLTD had liabilities of CN¥8.40b due within 12 months and liabilities of CN¥12.3b due beyond that. On the other hand, it had cash of CN¥699.1m and CN¥2.75b worth of receivables due within a year. So it has liabilities totalling CN¥17.3b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥6.44b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, DaTang HuaYin Electric PowerLTD would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DaTang HuaYin Electric PowerLTD's earnings that will influence how the balance sheet holds up in the future. 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 DaTang HuaYin Electric PowerLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to CN¥10b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, DaTang HuaYin Electric PowerLTD had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥88m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥3.2b in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For instance, we've identified 2 warning signs for DaTang HuaYin Electric PowerLTD that 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.