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.' 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. We note that Hunan Creator Information Technologies CO., LTD. (SZSE:300730) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Hunan Creator Information Technologies's Net Debt?

As you can see below, at the end of September 2024, Hunan Creator Information Technologies had CN¥286.8m of debt, up from CN¥210.0m a year ago. Click the image for more detail. On the flip side, it has CN¥77.5m in cash leading to net debt of about CN¥209.3m.

A Look At Hunan Creator Information Technologies' Liabilities

We can see from the most recent balance sheet that Hunan Creator Information Technologies had liabilities of CN¥516.6m falling due within a year, and liabilities of CN¥42.2m due beyond that. Offsetting these obligations, it had cash of CN¥77.5m as well as receivables valued at CN¥247.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥234.1m.

Since publicly traded Hunan Creator Information Technologies shares are worth a total of CN¥3.64b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hunan Creator Information Technologies'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, Hunan Creator Information Technologies made a loss at the EBIT level, and saw its revenue drop to CN¥208m, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hunan Creator Information Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥178m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥76m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Hunan Creator Information Technologies .

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.

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