HuiZhou Intelligence Technology Group (SZSE:002122) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for HuiZhou Intelligence Technology Group

How Much Debt Does HuiZhou Intelligence Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 HuiZhou Intelligence Technology Group had CN¥157.6m of debt, an increase on CN¥86.9m, over one year. But on the other hand it also has CN¥517.8m in cash, leading to a CN¥360.2m net cash position.

How Strong Is HuiZhou Intelligence Technology Group's Balance Sheet?

We can see from the most recent balance sheet that HuiZhou Intelligence Technology Group had liabilities of CN¥1.16b falling due within a year, and liabilities of CN¥36.0m due beyond that. On the other hand, it had cash of CN¥517.8m and CN¥301.8m worth of receivables due within a year. So its liabilities total CN¥380.7m more than the combination of its cash and short-term receivables.

Since publicly traded HuiZhou Intelligence Technology Group shares are worth a total of CN¥6.80b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, HuiZhou Intelligence Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is HuiZhou Intelligence Technology Group's earnings that will influence how the balance sheet holds up in the future. 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 HuiZhou Intelligence Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to CN¥867m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is HuiZhou Intelligence Technology Group?

While HuiZhou Intelligence Technology Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥84m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for HuiZhou Intelligence Technology Group (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.