Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Hengyi Petrochemical Co., Ltd. (SZSE:000703) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hengyi Petrochemical

How Much Debt Does Hengyi Petrochemical Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hengyi Petrochemical had CN¥68.7b of debt, an increase on CN¥63.7b, over one year. On the flip side, it has CN¥11.6b in cash leading to net debt of about CN¥57.1b.

A Look At Hengyi Petrochemical's Liabilities

The latest balance sheet data shows that Hengyi Petrochemical had liabilities of CN¥61.7b due within a year, and liabilities of CN¥22.0b falling due after that. Offsetting this, it had CN¥11.6b in cash and CN¥10.3b in receivables that were due within 12 months. So its liabilities total CN¥61.8b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥22.3b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hengyi Petrochemical would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hengyi Petrochemical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hengyi Petrochemical made a loss at the EBIT level, and saw its revenue drop to CN¥130b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

While Hengyi Petrochemical'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¥171m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥2.2b in the last year. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hengyi Petrochemical has 1 warning sign we think you should be aware of.

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.