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.' 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 Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Hangzhou Huaxing Chuangye Communication Technology Carry?
As you can see below, at the end of June 2024, Hangzhou Huaxing Chuangye Communication Technology had CN¥146.4m of debt, up from CN¥89.3m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥95.7m, its net debt is less, at about CN¥50.7m.
A Look At Hangzhou Huaxing Chuangye Communication Technology's Liabilities
Zooming in on the latest balance sheet data, we can see that Hangzhou Huaxing Chuangye Communication Technology had liabilities of CN¥312.3m due within 12 months and liabilities of CN¥7.05m due beyond that. On the other hand, it had cash of CN¥95.7m and CN¥472.6m worth of receivables due within a year. So it can boast CN¥248.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Hangzhou Huaxing Chuangye Communication Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Hangzhou Huaxing Chuangye Communication Technology has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hangzhou Huaxing Chuangye Communication 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 Hangzhou Huaxing Chuangye Communication Technology's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months Hangzhou Huaxing Chuangye Communication Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥32m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. 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 Hangzhou Huaxing Chuangye Communication Technology you should be aware of, and 1 of them is significant.
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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