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. We note that Hans Energy Company Limited (HKG:554) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Hans Energy
How Much Debt Does Hans Energy Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hans Energy had HK$659.4m of debt, an increase on HK$553.8m, over one year. However, it does have HK$318.9m in cash offsetting this, leading to net debt of about HK$340.5m.
How Strong Is Hans Energy's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hans Energy had liabilities of HK$799.4m due within 12 months and liabilities of HK$69.8m due beyond that. Offsetting this, it had HK$318.9m in cash and HK$24.8m in receivables that were due within 12 months. So its liabilities total HK$525.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Hans Energy has a market capitalization of HK$1.12b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Hans Energy's earnings that will influence how the balance sheet holds up in the future. 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 Hans Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to HK$1.2b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Hans Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at HK$21m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$52m into a profit. So in short it's a really risky stock. 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, we've discovered 1 warning sign for Hans Energy that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.