Is Huadian Power International (HKG:1071) Weighed On By Its Debt Load?

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. Importantly, Huadian Power International Corporation Limited (HKG:1071) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Huadian Power International

What Is Huadian Power International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Huadian Power International had CN¥121.2b of debt, an increase on CN¥100.4b, over one year. However, because it has a cash reserve of CN¥7.65b, its net debt is less, at about CN¥113.5b.

A Look At Huadian Power International's Liabilities

The latest balance sheet data shows that Huadian Power International had liabilities of CN¥58.5b due within a year, and liabilities of CN¥86.4b falling due after that. Offsetting these obligations, it had cash of CN¥7.65b as well as receivables valued at CN¥12.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥124.6b.

This deficit casts a shadow over the CN¥50.9b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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.

Over 12 months, Huadian Power International saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Huadian Power International had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥9.6b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥14b over the last twelve months. So suffice it to say we consider the stock to be risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Huadian Power International .

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.