We Think Huasu HoldingsLtd (SZSE:000509) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Huasu Holdings Co.,Ltd (SZSE:000509) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Huasu HoldingsLtd

What Is Huasu HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Huasu HoldingsLtd had CN¥183.9m of debt, an increase on CN¥135.9m, over one year. However, it does have CN¥63.4m in cash offsetting this, leading to net debt of about CN¥120.5m.

A Look At Huasu HoldingsLtd's Liabilities

The latest balance sheet data shows that Huasu HoldingsLtd had liabilities of CN¥538.0m due within a year, and liabilities of CN¥13.3m falling due after that. Offsetting these obligations, it had cash of CN¥63.4m as well as receivables valued at CN¥220.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥267.0m.

Since publicly traded Huasu HoldingsLtd shares are worth a total of CN¥3.96b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Huasu HoldingsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Huasu HoldingsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥980m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Huasu HoldingsLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥14m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥5.1m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Huasu HoldingsLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.