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. Importantly, Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Huizhou Speed Wireless TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, Huizhou Speed Wireless TechnologyLtd had CN¥1.04b of debt, up from CN¥995.3m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥402.5m, its net debt is less, at about CN¥632.8m.

How Healthy Is Huizhou Speed Wireless TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Huizhou Speed Wireless TechnologyLtd had liabilities of CN¥1.38b falling due within a year, and liabilities of CN¥306.2m due beyond that. Offsetting this, it had CN¥402.5m in cash and CN¥711.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥576.4m.

Given Huizhou Speed Wireless TechnologyLtd has a market capitalization of CN¥4.10b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Huizhou Speed Wireless TechnologyLtd'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.

Over 12 months, Huizhou Speed Wireless TechnologyLtd reported revenue of CN¥1.7b, which is a gain of 11%, 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.

Caveat Emptor

Importantly, Huizhou Speed Wireless TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥80m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥220m of cash over the last year. 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. To that end, you should learn about the 3 warning signs we've spotted with Huizhou Speed Wireless TechnologyLtd (including 2 which shouldn't be ignored) .

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.

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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.

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