Is Jiangsu Guofu Hydrogen Energy Equipment (HKG:2582) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jiangsu Guofu Hydrogen Energy Equipment Co., Ltd. (HKG:2582) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Jiangsu Guofu Hydrogen Energy Equipment Carry?

As you can see below, at the end of December 2024, Jiangsu Guofu Hydrogen Energy Equipment had CN¥926.6m of debt, up from CN¥837.1m a year ago. Click the image for more detail. However, it does have CN¥411.9m in cash offsetting this, leading to net debt of about CN¥514.7m.

A Look At Jiangsu Guofu Hydrogen Energy Equipment's Liabilities

The latest balance sheet data shows that Jiangsu Guofu Hydrogen Energy Equipment had liabilities of CN¥1.13b due within a year, and liabilities of CN¥440.1m falling due after that. Offsetting this, it had CN¥411.9m in cash and CN¥702.0m in receivables that were due within 12 months. So its liabilities total CN¥457.7m more than the combination of its cash and short-term receivables.

Since publicly traded Jiangsu Guofu Hydrogen Energy Equipment shares are worth a total of CN¥12.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Jiangsu Guofu Hydrogen Energy Equipment 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.

Check out our latest analysis for Jiangsu Guofu Hydrogen Energy Equipment

In the last year Jiangsu Guofu Hydrogen Energy Equipment had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥459m. We would much prefer see growth.

Caveat Emptor

While Jiangsu Guofu Hydrogen Energy Equipment's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥206m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥266m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Jiangsu Guofu Hydrogen Energy Equipment you should be aware of.

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.