Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Hunan Changyuan Lico Co.,Ltd. (SHSE:688779) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Hunan Changyuan LicoLtd's Net Debt?
As you can see below, Hunan Changyuan LicoLtd had CN¥3.68b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥3.24b in cash offsetting this, leading to net debt of about CN¥441.5m.
How Healthy Is Hunan Changyuan LicoLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hunan Changyuan LicoLtd had liabilities of CN¥2.42b due within 12 months and liabilities of CN¥3.47b due beyond that. Offsetting this, it had CN¥3.24b in cash and CN¥3.12b in receivables that were due within 12 months. So it actually has CN¥473.1m more liquid assets than total liabilities.
This surplus suggests that Hunan Changyuan LicoLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 Changyuan LicoLtd 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 Changyuan LicoLtd made a loss at the EBIT level, and saw its revenue drop to CN¥8.3b, which is a fall of 45%. To be frank that doesn't bode well.
Caveat Emptor
While Hunan Changyuan LicoLtd'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¥223m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Hunan Changyuan LicoLtd's profit, revenue, and operating cashflow have changed over the last few years.
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.
