Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Holitech Technology Co., Ltd. (SZSE:002217) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.
View our latest analysis for Holitech Technology
How Much Debt Does Holitech Technology Carry?
You can click the graphic below for the historical numbers, but it shows that Holitech Technology had CN¥8.75b of debt in June 2023, down from CN¥11.1b, one year before. However, because it has a cash reserve of CN¥1.63b, its net debt is less, at about CN¥7.12b.
How Healthy Is Holitech Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Holitech Technology had liabilities of CN¥12.9b due within 12 months and liabilities of CN¥2.53b due beyond that. Offsetting this, it had CN¥1.63b in cash and CN¥3.00b in receivables that were due within 12 months. So its liabilities total CN¥10.8b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's CN¥10.0b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Holitech Technology 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.
In the last year Holitech Technology had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥9.0b. To be frank that doesn't bode well.
Caveat Emptor
Not only did Holitech Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥4.3b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥4.9b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. For example, we've discovered 2 warning signs for Holitech Technology (1 is concerning!) 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.
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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.
