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. We note that Huayuan Property Co.,Ltd. (SHSE:600743) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Huayuan PropertyLtd's Debt?

As you can see below, Huayuan PropertyLtd had CN¥12.2b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥867.6m in cash, and so its net debt is CN¥11.4b.

How Strong Is Huayuan PropertyLtd's Balance Sheet?

According to the last reported balance sheet, Huayuan PropertyLtd had liabilities of CN¥11.0b due within 12 months, and liabilities of CN¥12.8b due beyond 12 months. Offsetting this, it had CN¥867.6m in cash and CN¥1.62b in receivables that were due within 12 months. So it has liabilities totalling CN¥21.3b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥4.55b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Huayuan PropertyLtd would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Huayuan PropertyLtd will need earnings to service that debt. 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.

In the last year Huayuan PropertyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to CN¥13b. 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 Huayuan PropertyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥200m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥1.9b in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Case in point: We've spotted 2 warning signs for Huayuan PropertyLtd 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.