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.' 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. Importantly, Henan Yicheng New Energy Co., Ltd. (SZSE:300080) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Henan Yicheng New Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Henan Yicheng New Energy had CN¥2.22b of debt, an increase on CN¥2.13b, over one year. However, it does have CN¥1.66b in cash offsetting this, leading to net debt of about CN¥552.2m.

How Healthy Is Henan Yicheng New Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Henan Yicheng New Energy had liabilities of CN¥5.37b due within 12 months and liabilities of CN¥2.62b due beyond that. Offsetting this, it had CN¥1.66b in cash and CN¥3.01b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.32b more than its cash and near-term receivables, combined.

Henan Yicheng New Energy has a market capitalization of CN¥8.19b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Henan Yicheng New Energy 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.

In the last year Henan Yicheng New Energy had a loss before interest and tax, and actually shrunk its revenue by 52%, to CN¥5.3b. That makes us nervous, to say the least.

Caveat Emptor

While Henan Yicheng New Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥509m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥776m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Henan Yicheng New Energy you should be aware of, and 1 of them shouldn't be ignored.

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.