Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hangzhou Changchuan Technology Co.,Ltd (SZSE:300604) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hangzhou Changchuan TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, Hangzhou Changchuan TechnologyLtd had CN¥1.18b of debt, up from CN¥516.5m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥686.6m, its net debt is less, at about CN¥496.6m.

How Healthy Is Hangzhou Changchuan TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Hangzhou Changchuan TechnologyLtd had liabilities of CN¥1.84b due within 12 months, and liabilities of CN¥570.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥686.6m as well as receivables valued at CN¥1.25b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥466.9m.

Since publicly traded Hangzhou Changchuan TechnologyLtd shares are worth a total of CN¥20.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hangzhou Changchuan TechnologyLtd can strengthen its balance sheet over time. 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 Hangzhou Changchuan TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥2.0b. That's not what we would hope to see.

Caveat Emptor

While Hangzhou Changchuan TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥1.2m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥974m of cash over the last year. So to be blunt we think it is risky. 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. For instance, we've identified 3 warning signs for Hangzhou Changchuan TechnologyLtd (1 is a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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