Is GCL New Energy Holdings (HKG:451) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies GCL New Energy Holdings Limited (HKG:451) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for GCL New Energy Holdings

What Is GCL New Energy Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that GCL New Energy Holdings had CN¥2.96b of debt in June 2023, down from CN¥4.79b, one year before. However, it does have CN¥853.5m in cash offsetting this, leading to net debt of about CN¥2.10b.

How Strong Is GCL New Energy Holdings' Balance Sheet?

The latest balance sheet data shows that GCL New Energy Holdings had liabilities of CN¥3.14b due within a year, and liabilities of CN¥2.14b falling due after that. On the other hand, it had cash of CN¥853.5m and CN¥2.56b worth of receivables due within a year. So it has liabilities totalling CN¥1.87b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥410.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, GCL New Energy Holdings 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 it is GCL New Energy Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year GCL New Energy Holdings had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥794m. That makes us nervous, to say the least.

Caveat Emptor

While GCL New Energy Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥26m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CN¥1.2b in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with GCL New Energy Holdings (including 1 which is a bit concerning) .

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.