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. As with many other companies Hunan New Wellful Co.,Ltd. (SHSE:600975) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Hunan New WellfulLtd Carry?

As you can see below, Hunan New WellfulLtd had CN¥3.03b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.21b in cash, and so its net debt is CN¥1.83b.

How Strong Is Hunan New WellfulLtd's Balance Sheet?

The latest balance sheet data shows that Hunan New WellfulLtd had liabilities of CN¥3.15b due within a year, and liabilities of CN¥6.27b falling due after that. Offsetting these obligations, it had cash of CN¥1.21b as well as receivables valued at CN¥214.4m due within 12 months. So its liabilities total CN¥8.01b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥7.05b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hunan New WellfulLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hunan New WellfulLtd reported revenue of CN¥6.3b, which is a gain of 5.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Hunan New WellfulLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥550m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥339m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that Hunan New WellfulLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.