Warren Buffett famously said, '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. As with many other companies GCL New Energy Holdings Limited (HKG:451) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is GCL New Energy Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2025 GCL New Energy Holdings had CN¥934.8m of debt, an increase on CN¥434.4m, over one year. However, because it has a cash reserve of CN¥317.3m, its net debt is less, at about CN¥617.4m.
A Look At GCL New Energy Holdings' Liabilities
According to the last reported balance sheet, GCL New Energy Holdings had liabilities of CN¥672.8m due within 12 months, and liabilities of CN¥1.18b due beyond 12 months. Offsetting this, it had CN¥317.3m in cash and CN¥1.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥447.3m.
While this might seem like a lot, it is not so bad since GCL New Energy Holdings has a market capitalization of CN¥951.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GCL New Energy Holdings 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 GCL New Energy Holdings
In the last year GCL New Energy Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥1.3b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, GCL New Energy Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥152m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥598m into a profit. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for GCL New Energy Holdings that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.