Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that HAND Enterprise Solutions Co., Ltd. (SZSE:300170) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does HAND Enterprise Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that HAND Enterprise Solutions had CN¥497.1m of debt in March 2024, down from CN¥1.47b, one year before. But it also has CN¥1.47b in cash to offset that, meaning it has CN¥969.8m net cash.
A Look At HAND Enterprise Solutions' Liabilities
According to the last reported balance sheet, HAND Enterprise Solutions had liabilities of CN¥979.5m due within 12 months, and liabilities of CN¥113.8m due beyond 12 months. Offsetting this, it had CN¥1.47b in cash and CN¥1.59b in receivables that were due within 12 months. So it can boast CN¥1.96b more liquid assets than total liabilities.
This luscious liquidity implies that HAND Enterprise Solutions' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, HAND Enterprise Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is HAND Enterprise Solutions'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, HAND Enterprise Solutions saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is HAND Enterprise Solutions?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year HAND Enterprise Solutions had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥126m of cash and made a loss of CN¥6.6m. Given it only has net cash of CN¥969.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for HAND Enterprise Solutions you should know about.
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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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.