Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Hanwang Technology Co.,Ltd (SZSE:002362) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

What Is Hanwang TechnologyLtd's Debt?

As you can see below, at the end of March 2024, Hanwang TechnologyLtd had CN¥94.2m of debt, up from CN¥49.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥595.9m in cash, so it actually has CN¥501.7m net cash.

How Strong Is Hanwang TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Hanwang TechnologyLtd had liabilities of CN¥439.4m due within 12 months, and liabilities of CN¥9.47m due beyond 12 months. On the other hand, it had cash of CN¥595.9m and CN¥240.2m worth of receivables due within a year. So it can boast CN¥387.3m more liquid assets than total liabilities.

This surplus suggests that Hanwang TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hanwang TechnologyLtd 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 future earnings, more than anything, that will determine Hanwang TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Hanwang TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 4.1%, to CN¥1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Hanwang TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Hanwang TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥245m of cash and made a loss of CN¥120m. But at least it has CN¥501.7m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Hanwang TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com