Is Huadian Power International (HKG:1071) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Huadian Power International Corporation Limited (HKG:1071) makes use of debt. But should shareholders be worried about its use of debt?

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, 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.

View our latest analysis for Huadian Power International

What Is Huadian Power International's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Huadian Power International had debt of CN¥117.6b, up from CN¥107.4b in one year. However, it also had CN¥6.66b in cash, and so its net debt is CN¥110.9b.

How Strong Is Huadian Power International's Balance Sheet?

We can see from the most recent balance sheet that Huadian Power International had liabilities of CN¥54.6b falling due within a year, and liabilities of CN¥85.4b due beyond that. On the other hand, it had cash of CN¥6.66b and CN¥11.1b worth of receivables due within a year. So it has liabilities totalling CN¥122.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥37.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Huadian Power International would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Huadian Power International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Huadian Power International wasn't profitable at an EBIT level, but managed to grow its revenue by 2.3%, to CN¥103b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Huadian Power International produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥12b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥19b in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Huadian Power International is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.