Is HuiZhou Intelligence Technology Group (SZSE:002122) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for HuiZhou Intelligence Technology Group

What Is HuiZhou Intelligence Technology Group's Net Debt?

The image below, which you can click on for greater detail, shows that HuiZhou Intelligence Technology Group had debt of CN¥53.0m at the end of March 2024, a reduction from CN¥127.6m over a year. However, its balance sheet shows it holds CN¥567.9m in cash, so it actually has CN¥514.9m net cash.

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

The latest balance sheet data shows that HuiZhou Intelligence Technology Group had liabilities of CN¥1.23b due within a year, and liabilities of CN¥36.0m falling due after that. Offsetting this, it had CN¥567.9m in cash and CN¥356.2m in receivables that were due within 12 months. So its liabilities total CN¥340.4m more than the combination of its cash and short-term receivables.

Of course, HuiZhou Intelligence Technology Group has a market capitalization of CN¥5.44b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, HuiZhou Intelligence Technology Group reported revenue of CN¥832m, which is a gain of 13%, although it did not report any earnings before interest and tax. 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¥81m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - HuiZhou Intelligence Technology Group has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.