Health Check: How Prudently Does Ouhua Energy Holdings (SGX:AJ2) Use 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 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. We note that Ouhua Energy Holdings Limited (SGX:AJ2) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Ouhua Energy Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Ouhua Energy Holdings had CN¥534.7m of debt in June 2025, down from CN¥592.9m, one year before. However, it does have CN¥26.5m in cash offsetting this, leading to net debt of about CN¥508.2m.

A Look At Ouhua Energy Holdings' Liabilities

According to the last reported balance sheet, Ouhua Energy Holdings had liabilities of CN¥662.6m due within 12 months, and liabilities of CN¥57.0m due beyond 12 months. On the other hand, it had cash of CN¥26.5m and CN¥118.4m worth of receivables due within a year. So its liabilities total CN¥574.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥89.6m 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, Ouhua Energy Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ouhua 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.

See our latest analysis for Ouhua Energy Holdings

In the last year Ouhua Energy Holdings had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥2.5b. That's not what we would hope to see.

Caveat Emptor

While Ouhua 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. Indeed, it lost a very considerable CN¥63m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 CN¥77m in the last year. So we think buying this stock is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Ouhua Energy Holdings (including 3 which are a bit unpleasant) .

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.