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 Hanwang Technology Co.,Ltd (SZSE:002362) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Hanwang TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hanwang TechnologyLtd had debt of CN¥113.8m, up from CN¥85.8m in one year. But it also has CN¥549.8m in cash to offset that, meaning it has CN¥436.0m net cash.

How Strong Is Hanwang TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Hanwang TechnologyLtd had liabilities of CN¥494.7m due within 12 months, and liabilities of CN¥4.97m due beyond 12 months. Offsetting these obligations, it had cash of CN¥549.8m as well as receivables valued at CN¥227.1m due within 12 months. So it actually has CN¥277.3m more liquid assets than total liabilities.

This surplus suggests that Hanwang TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hanwang TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hanwang TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hanwang TechnologyLtd reported revenue of CN¥1.6b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Hanwang TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Hanwang TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥149m and booked a CN¥120m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥436.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Hanwang TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.