Is Jiangsu Huahong Technology (SZSE:002645) Using Too Much Debt?

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.' 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. As with many other companies Jiangsu Huahong Technology Co., Ltd. (SZSE:002645) makes use of debt. But is this debt a concern to shareholders?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jiangsu Huahong Technology

What Is Jiangsu Huahong Technology's Debt?

The chart below, which you can click on for greater detail, shows that Jiangsu Huahong Technology had CN¥1.12b in debt in September 2024; about the same as the year before. However, it also had CN¥744.3m in cash, and so its net debt is CN¥372.6m.

How Healthy Is Jiangsu Huahong Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Huahong Technology had liabilities of CN¥1.67b due within 12 months and liabilities of CN¥708.2m due beyond that. Offsetting this, it had CN¥744.3m in cash and CN¥825.8m in receivables that were due within 12 months. So its liabilities total CN¥812.0m more than the combination of its cash and short-term receivables.

Of course, Jiangsu Huahong Technology has a market capitalization of CN¥4.29b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Huahong Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Jiangsu Huahong Technology made a loss at the EBIT level, and saw its revenue drop to CN¥5.6b, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Jiangsu Huahong Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥130m 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. However, it doesn't help that it burned through CN¥104m of cash over the last year. So to be blunt we think it is risky. For riskier companies like Jiangsu Huahong Technology 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.