Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Hi-Target Navigation Tech Co.,Ltd (SZSE:300177) does carry debt. But the more important question is: how much risk is that debt creating?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?
You can click the graphic below for the historical numbers, but it shows that Hi-Target Navigation TechLtd had CN¥495.5m of debt in September 2023, down from CN¥534.7m, one year before. On the flip side, it has CN¥412.7m in cash leading to net debt of about CN¥82.8m.
How Strong Is Hi-Target Navigation TechLtd's Balance Sheet?
The latest balance sheet data shows that Hi-Target Navigation TechLtd had liabilities of CN¥1.48b due within a year, and liabilities of CN¥71.2m falling due after that. Offsetting this, it had CN¥412.7m in cash and CN¥1.64b in receivables that were due within 12 months. So it can boast CN¥497.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Hi-Target Navigation TechLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hi-Target Navigation TechLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Hi-Target Navigation TechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 11%. We would much prefer see growth.
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 CN¥235m 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. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Hi-Target Navigation TechLtd you should be aware of, and 1 of them can't be ignored.
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.