Is Henan Jinyuan Hydrogenated Chemicals (HKG:2502) Using Too Much Debt?

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.' 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 note that Henan Jinyuan Hydrogenated Chemicals Co., Ltd. (HKG:2502) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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, 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Henan Jinyuan Hydrogenated Chemicals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Henan Jinyuan Hydrogenated Chemicals had CN¥365.8m of debt, an increase on CN¥339.7m, over one year. But on the other hand it also has CN¥375.6m in cash, leading to a CN¥9.71m net cash position.

How Healthy Is Henan Jinyuan Hydrogenated Chemicals' Balance Sheet?

According to the last reported balance sheet, Henan Jinyuan Hydrogenated Chemicals had liabilities of CN¥432.5m due within 12 months, and liabilities of CN¥113.3m due beyond 12 months. Offsetting this, it had CN¥375.6m in cash and CN¥73.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥97.0m.

This deficit isn't so bad because Henan Jinyuan Hydrogenated Chemicals is worth CN¥385.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Henan Jinyuan Hydrogenated Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Henan Jinyuan Hydrogenated Chemicals 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.

View our latest analysis for Henan Jinyuan Hydrogenated Chemicals

In the last year Henan Jinyuan Hydrogenated Chemicals wasn't profitable at an EBIT level, but managed to grow its revenue by 3.0%, to CN¥2.9b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Henan Jinyuan Hydrogenated Chemicals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Henan Jinyuan Hydrogenated Chemicals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥20m and booked a CN¥67m accounting loss. Given it only has net cash of CN¥9.71m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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, we've discovered 2 warning signs for Henan Jinyuan Hydrogenated Chemicals (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.