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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Houpu Clean Energy Group Co., Ltd. (SZSE:300471) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Houpu Clean Energy Group Carry?

You can click the graphic below for the historical numbers, but it shows that Houpu Clean Energy Group had CN¥265.3m of debt in September 2024, down from CN¥292.7m, one year before. On the flip side, it has CN¥232.6m in cash leading to net debt of about CN¥32.7m.

How Strong Is Houpu Clean Energy Group's Balance Sheet?

According to the last reported balance sheet, Houpu Clean Energy Group had liabilities of CN¥1.04b due within 12 months, and liabilities of CN¥38.8m due beyond 12 months. Offsetting this, it had CN¥232.6m in cash and CN¥314.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥529.5m more than its cash and near-term receivables, combined.

Since publicly traded Houpu Clean Energy Group shares are worth a total of CN¥3.85b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Houpu Clean Energy Group has virtually no net debt, 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 Houpu Clean Energy Group'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, Houpu Clean Energy Group made a loss at the EBIT level, and saw its revenue drop to CN¥679m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Houpu Clean Energy Group'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 CN¥62m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥51m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Houpu Clean Energy Group's profit, revenue, and operating cashflow have changed over the last few years.

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.