China Datang Corporation Renewable Power (HKG:1798) Has No Shortage Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that China Datang Corporation Renewable Power Co., Limited (HKG:1798) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China Datang Corporation Renewable Power's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 China Datang Corporation Renewable Power had CN¥68.1b of debt, an increase on CN¥58.7b, over one year. However, because it has a cash reserve of CN¥2.13b, its net debt is less, at about CN¥66.0b.

How Strong Is China Datang Corporation Renewable Power's Balance Sheet?

We can see from the most recent balance sheet that China Datang Corporation Renewable Power had liabilities of CN¥24.7b falling due within a year, and liabilities of CN¥52.9b due beyond that. Offsetting this, it had CN¥2.13b in cash and CN¥24.7b in receivables that were due within 12 months. So its liabilities total CN¥50.8b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥16.4b 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, China Datang Corporation Renewable Power would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for China Datang Corporation Renewable Power

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 6.5, it's fair to say China Datang Corporation Renewable Power does have a significant amount of debt. However, its interest coverage of 3.1 is reasonably strong, which is a good sign. Even more troubling is the fact that China Datang Corporation Renewable Power actually let its EBIT decrease by 4.4% over the last year. If that earnings trend continues the company will face an uphill battle to pay off its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine China Datang Corporation Renewable Power's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, China Datang Corporation Renewable Power saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, China Datang Corporation Renewable Power's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And even its interest cover fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like China Datang Corporation Renewable Power 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with China Datang Corporation Renewable Power (including 1 which makes us a bit uncomfortable) .

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.