Is HuiZhou Intelligence Technology Group (SZSE:002122) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) does carry debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HuiZhou Intelligence Technology Group

What Is HuiZhou Intelligence Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that HuiZhou Intelligence Technology Group had CN¥161.8m of debt in June 2024, down from CN¥176.0m, one year before. But it also has CN¥565.4m in cash to offset that, meaning it has CN¥403.7m net cash.

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

According to the last reported balance sheet, HuiZhou Intelligence Technology Group had liabilities of CN¥1.21b due within 12 months, and liabilities of CN¥38.7m due beyond 12 months. On the other hand, it had cash of CN¥565.4m and CN¥315.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥372.3m.

Since publicly traded HuiZhou Intelligence Technology Group shares are worth a total of CN¥4.40b, 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year HuiZhou Intelligence Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥844m. We usually like to see faster growth from unprofitable companies, but each to their own.

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¥107m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with HuiZhou Intelligence Technology Group , and understanding them should be part of your investment process.

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.