The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Kunming Yunnei Power Co.,Ltd. (SZSE:000903) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
See our latest analysis for Kunming Yunnei PowerLtd
What Is Kunming Yunnei PowerLtd's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Kunming Yunnei PowerLtd had debt of CN¥2.26b, up from CN¥1.84b in one year. However, because it has a cash reserve of CN¥1.31b, its net debt is less, at about CN¥947.1m.
A Look At Kunming Yunnei PowerLtd's Liabilities
According to the last reported balance sheet, Kunming Yunnei PowerLtd had liabilities of CN¥8.76b due within 12 months, and liabilities of CN¥729.5m due beyond 12 months. On the other hand, it had cash of CN¥1.31b and CN¥2.94b worth of receivables due within a year. So it has liabilities totalling CN¥5.24b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥5.57b, so it does suggest shareholders should keep an eye on Kunming Yunnei PowerLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kunming Yunnei PowerLtd'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, Kunming Yunnei PowerLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.6b, which is a fall of 24%. To be frank that doesn't bode well.
Caveat Emptor
Not only did Kunming Yunnei PowerLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.1b 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. However, it doesn't help that it burned through CN¥1.6b of cash over the last year. 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 - Kunming Yunnei PowerLtd has 1 warning sign we think 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.
