Is Guangdong Meiyanjixiang HydropowerLtd (SHSE:600868) 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.' 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 Guangdong Meiyanjixiang Hydropower Co.,Ltd. (SHSE:600868) does use debt in its business. But is this debt a concern to shareholders?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guangdong Meiyanjixiang HydropowerLtd

How Much Debt Does Guangdong Meiyanjixiang HydropowerLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Guangdong Meiyanjixiang HydropowerLtd had CN¥114.8m of debt in June 2024, down from CN¥125.0m, one year before. But it also has CN¥350.7m in cash to offset that, meaning it has CN¥235.9m net cash.

How Healthy Is Guangdong Meiyanjixiang HydropowerLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Meiyanjixiang HydropowerLtd had liabilities of CN¥262.5m falling due within a year, and liabilities of CN¥128.4m due beyond that. Offsetting these obligations, it had cash of CN¥350.7m as well as receivables valued at CN¥438.5m due within 12 months. So it actually has CN¥398.3m more liquid assets than total liabilities.

This surplus suggests that Guangdong Meiyanjixiang HydropowerLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Meiyanjixiang HydropowerLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Meiyanjixiang HydropowerLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Guangdong Meiyanjixiang HydropowerLtd made a loss at the EBIT level, and saw its revenue drop to CN¥299m, which is a fall of 32%. To be frank that doesn't bode well.

So How Risky Is Guangdong Meiyanjixiang HydropowerLtd?

Although Guangdong Meiyanjixiang HydropowerLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥96m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Guangdong Meiyanjixiang HydropowerLtd , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.