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. Importantly, Hua Ying Technology (Gruop) Co., Ltd. (SZSE:000536) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hua Ying Technology (Gruop)'s Net Debt?

The chart below, which you can click on for greater detail, shows that Hua Ying Technology (Gruop) had CN¥3.57b in debt in March 2024; about the same as the year before. However, it also had CN¥1.04b in cash, and so its net debt is CN¥2.54b.

How Healthy Is Hua Ying Technology (Gruop)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hua Ying Technology (Gruop) had liabilities of CN¥3.82b due within 12 months and liabilities of CN¥1.23b due beyond that. Offsetting this, it had CN¥1.04b in cash and CN¥215.8m in receivables that were due within 12 months. So its liabilities total CN¥3.80b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥5.17b, so it does suggest shareholders should keep an eye on Hua Ying Technology (Gruop)'s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hua Ying Technology (Gruop) 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.

Over 12 months, Hua Ying Technology (Gruop) made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did Hua Ying Technology (Gruop)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.3b 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥370m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Hua Ying Technology (Gruop) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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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