Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hangzhou EZVIZ Network Co., Ltd. (SHSE:688475) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Hangzhou EZVIZ Network's Debt?
You can click the graphic below for the historical numbers, but it shows that Hangzhou EZVIZ Network had CN¥364.8m of debt in March 2024, down from CN¥430.6m, one year before. However, it does have CN¥4.39b in cash offsetting this, leading to net cash of CN¥4.02b.
A Look At Hangzhou EZVIZ Network's Liabilities
The latest balance sheet data shows that Hangzhou EZVIZ Network had liabilities of CN¥1.98b due within a year, and liabilities of CN¥568.5m falling due after that. On the other hand, it had cash of CN¥4.39b and CN¥832.8m worth of receivables due within a year. So it actually has CN¥2.68b more liquid assets than total liabilities.
This short term liquidity is a sign that Hangzhou EZVIZ Network could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou EZVIZ Network has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Hangzhou EZVIZ Network has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hangzhou EZVIZ Network'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hangzhou EZVIZ Network has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Hangzhou EZVIZ Network created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Hangzhou EZVIZ Network has CN¥4.02b in net cash and a decent-looking balance sheet. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think Hangzhou EZVIZ Network's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Hangzhou EZVIZ Network (1 is a bit unpleasant) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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