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 Hunan Baili Engineering Sci&Tech Co.,Ltd (SHSE:603959) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Hunan Baili Engineering Sci&TechLtd
How Much Debt Does Hunan Baili Engineering Sci&TechLtd Carry?
The image below, which you can click on for greater detail, shows that at June 2023 Hunan Baili Engineering Sci&TechLtd had debt of CN¥709.2m, up from CN¥562.2m in one year. However, it also had CN¥599.8m in cash, and so its net debt is CN¥109.3m.
How Healthy Is Hunan Baili Engineering Sci&TechLtd's Balance Sheet?
According to the last reported balance sheet, Hunan Baili Engineering Sci&TechLtd had liabilities of CN¥3.58b due within 12 months, and liabilities of CN¥21.7m due beyond 12 months. On the other hand, it had cash of CN¥599.8m and CN¥1.90b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.10b.
Hunan Baili Engineering Sci&TechLtd has a market capitalization of CN¥3.84b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hunan Baili Engineering Sci&TechLtd'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, Hunan Baili Engineering Sci&TechLtd reported revenue of CN¥3.2b, which is a gain of 95%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Even though Hunan Baili Engineering Sci&TechLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥51m. 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¥235m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Hunan Baili Engineering Sci&TechLtd has 2 warning signs (and 1 which is potentially serious) we think you should know about.
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.