China Primary Energy Holdings (HKG:8117) Has Debt But No Earnings; Should You Worry?

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, China Primary Energy Holdings Limited (HKG:8117) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 China Primary Energy Holdings

What Is China Primary Energy Holdings's Debt?

As you can see below, at the end of December 2023, China Primary Energy Holdings had HK$345.4m of debt, up from HK$299.4m a year ago. Click the image for more detail. However, it also had HK$30.7m in cash, and so its net debt is HK$314.8m.

How Strong Is China Primary Energy Holdings' Balance Sheet?

According to the last reported balance sheet, China Primary Energy Holdings had liabilities of HK$125.6m due within 12 months, and liabilities of HK$329.1m due beyond 12 months. On the other hand, it had cash of HK$30.7m and HK$51.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$372.5m.

This deficit casts a shadow over the HK$51.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Primary 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 Primary 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.

Over 12 months, China Primary Energy Holdings 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

Over the last twelve months China Primary Energy Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$6.9m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$18m in the last year. So we think buying this stock is 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. We've identified 3 warning signs with China Primary Energy Holdings , and understanding them should be part of your investment process.

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.