Does Huaibei GreenGold Industry Investment (HKG:2450) Have A Healthy Balance Sheet?

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, Huaibei GreenGold Industry Investment Co., Ltd. (HKG:2450) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Huaibei GreenGold Industry Investment's Debt?

You can click the graphic below for the historical numbers, but it shows that Huaibei GreenGold Industry Investment had CN¥1.34b of debt in June 2025, down from CN¥1.55b, one year before. However, it also had CN¥385.8m in cash, and so its net debt is CN¥950.0m.

How Healthy Is Huaibei GreenGold Industry Investment's Balance Sheet?

The latest balance sheet data shows that Huaibei GreenGold Industry Investment had liabilities of CN¥369.6m due within a year, and liabilities of CN¥1.20b falling due after that. Offsetting this, it had CN¥385.8m in cash and CN¥26.6m in receivables that were due within 12 months. So its liabilities total CN¥1.16b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥732.9m 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, Huaibei GreenGold Industry Investment would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Huaibei GreenGold Industry Investment

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.90 times and a disturbingly high net debt to EBITDA ratio of 6.1 hit our confidence in Huaibei GreenGold Industry Investment like a one-two punch to the gut. The debt burden here is substantial. Investors should also be troubled by the fact that Huaibei GreenGold Industry Investment saw its EBIT drop by 17% over the last twelve months. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Huaibei GreenGold Industry Investment 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, Huaibei GreenGold Industry Investment recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

To be frank both Huaibei GreenGold Industry Investment's net debt to EBITDA and its track record of covering its interest expense with its EBIT make us rather uncomfortable with its debt levels. But at least its conversion of EBIT to free cash flow is not so bad. After considering the datapoints discussed, we think Huaibei GreenGold Industry Investment has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. For example - Huaibei GreenGold Industry Investment has 2 warning signs we think you should be aware of.

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.