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.' 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 Hoyuan Green Energy Co., Ltd. (SHSE:603185) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hoyuan Green Energy's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Hoyuan Green Energy had debt of CN¥2.11b, up from CN¥500.5m in one year. However, it does have CN¥9.74b in cash offsetting this, leading to net cash of CN¥7.62b.

How Healthy Is Hoyuan Green Energy's Balance Sheet?

According to the last reported balance sheet, Hoyuan Green Energy had liabilities of CN¥17.1b due within 12 months, and liabilities of CN¥1.29b due beyond 12 months. Offsetting this, it had CN¥9.74b in cash and CN¥977.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥7.64b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥9.00b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Hoyuan Green Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hoyuan Green Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hoyuan Green Energy had a loss before interest and tax, and actually shrunk its revenue by 51%, to CN¥8.7b. To be frank that doesn't bode well.

So How Risky Is Hoyuan Green Energy?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Hoyuan Green Energy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥3.7b of cash and made a loss of CN¥1.4b. Given it only has net cash of CN¥7.62b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Hoyuan Green Energy .

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.