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.' 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 Hunan Huamin Holdings Co., Ltd. (SZSE:300345) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Hunan Huamin Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hunan Huamin Holdings had CN¥182.5m of debt, an increase on CN¥60.0m, over one year. But it also has CN¥287.5m in cash to offset that, meaning it has CN¥105.0m net cash.

How Healthy Is Hunan Huamin Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hunan Huamin Holdings had liabilities of CN¥1.38b due within 12 months and liabilities of CN¥556.0m due beyond that. Offsetting this, it had CN¥287.5m in cash and CN¥400.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.25b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hunan Huamin Holdings is worth CN¥3.70b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Hunan Huamin Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Hunan Huamin Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Hunan Huamin Holdings reported revenue of CN¥1.2b, which is a gain of 199%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Hunan Huamin Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Hunan Huamin Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥427m of cash and made a loss of CN¥251m. With only CN¥105.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Hunan Huamin Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For instance, we've identified 2 warning signs for Hunan Huamin Holdings that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com