Is China Ruifeng Renewable Energy Holdings (HKG:527) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that China Ruifeng Renewable Energy Holdings Limited (HKG:527) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that 527 is potentially undervalued!

How Much Debt Does China Ruifeng Renewable Energy Holdings Carry?

As you can see below, China Ruifeng Renewable Energy Holdings had CN¥1.80b of debt at June 2022, down from CN¥1.89b a year prior. However, it does have CN¥267.2m in cash offsetting this, leading to net debt of about CN¥1.53b.

How Strong Is China Ruifeng Renewable Energy Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Ruifeng Renewable Energy Holdings had liabilities of CN¥543.9m due within 12 months and liabilities of CN¥1.46b due beyond that. Offsetting this, it had CN¥267.2m in cash and CN¥548.2m in receivables that were due within 12 months. So its liabilities total CN¥1.19b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥258.4m 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 definitely think shareholders need to watch this one closely. After all, China Ruifeng Renewable Energy Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is China Ruifeng Renewable 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 China Ruifeng Renewable Energy Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to CN¥333m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months China Ruifeng Renewable Energy Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥196m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥376m 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. Case in point: We've spotted 3 warning signs for China Ruifeng Renewable Energy Holdings you should be aware of, and 1 of them is potentially serious.

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.