Is China Primary Energy Holdings (HKG:8117) Using Debt In A Risky Way?

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.' 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 China Primary Energy Holdings Limited (HKG:8117) makes use of debt. But is this debt a concern to shareholders?

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China Primary Energy Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 China Primary Energy Holdings had HK$377.7m of debt, an increase on HK$345.4m, over one year. However, because it has a cash reserve of HK$49.1m, its net debt is less, at about HK$328.6m.

How Strong Is China Primary Energy Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Primary Energy Holdings had liabilities of HK$172.8m due within 12 months and liabilities of HK$322.2m due beyond that. On the other hand, it had cash of HK$49.1m and HK$38.5m worth of receivables due within a year. So it has liabilities totalling HK$407.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$52.2m 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. At the end of the day, China Primary Energy Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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.

Check out our latest analysis for China Primary Energy Holdings

Over 12 months, China Primary Energy Holdings made a loss at the EBIT level, and saw its revenue drop to HK$161m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

While China Primary 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. Its EBIT loss was a whopping HK$11m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$26m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. We've identified 3 warning signs with China Primary Energy Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.