Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Hi-Target Navigation Tech Co.,Ltd (SZSE:300177) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Hi-Target Navigation TechLtd Carry?

As you can see below, Hi-Target Navigation TechLtd had CN¥547.4m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥353.0m in cash offsetting this, leading to net debt of about CN¥194.4m.

How Strong Is Hi-Target Navigation TechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hi-Target Navigation TechLtd had liabilities of CN¥1.41b due within 12 months and liabilities of CN¥62.8m due beyond that. On the other hand, it had cash of CN¥353.0m and CN¥1.27b worth of receivables due within a year. So it can boast CN¥142.4m more liquid assets than total liabilities.

This surplus suggests that Hi-Target Navigation TechLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hi-Target Navigation TechLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hi-Target Navigation TechLtd had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥1.0b. To be frank that doesn't bode well.

Caveat Emptor

While Hi-Target Navigation TechLtd'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 a very considerable CN¥522m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Hi-Target Navigation TechLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.