Is China Primary Energy Holdings (HKG:8117) Using Debt Sensibly?

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 can see that China Primary Energy Holdings Limited (HKG:8117) does use debt in its business. But the real question is whether this debt is making the company risky.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 China Primary Energy Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 China Primary Energy Holdings had debt of HK$399.1m, up from HK$366.6m in one year. However, because it has a cash reserve of HK$67.9m, its net debt is less, at about HK$331.2m.

How Strong Is China Primary Energy Holdings' Balance Sheet?

According to the last reported balance sheet, China Primary Energy Holdings had liabilities of HK$184.3m due within 12 months, and liabilities of HK$334.1m due beyond 12 months. Offsetting this, it had HK$67.9m in cash and HK$41.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$409.4m.

This deficit casts a shadow over the HK$71.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China Primary Energy Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Primary Energy Holdings 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.

View our latest analysis for China Primary Energy Holdings

In the last year China Primary Energy Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 4.1%, to HK$184m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months China Primary Energy Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$3.2m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized HK$14m in cash over the last twelve months, and it doesn't have much by way of liquid assets. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for China Primary Energy Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.