Would Jiangsu Huahong Technology (SZSE:002645) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Jiangsu Huahong Technology Co., Ltd. (SZSE:002645) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu Huahong Technology

What Is Jiangsu Huahong Technology's Debt?

The image below, which you can click on for greater detail, shows that Jiangsu Huahong Technology had debt of CN¥1.07b at the end of March 2024, a reduction from CN¥1.27b over a year. On the flip side, it has CN¥1.05b in cash leading to net debt of about CN¥23.8m.

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¥1.44b due within 12 months and liabilities of CN¥725.3m due beyond that. Offsetting this, it had CN¥1.05b in cash and CN¥714.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥403.7m more than its cash and near-term receivables, combined.

Given Jiangsu Huahong Technology has a market capitalization of CN¥5.09b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Jiangsu Huahong Technology has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Huahong Technology will need earnings to service that debt. 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, Jiangsu Huahong Technology made a loss at the EBIT level, and saw its revenue drop to CN¥6.3b, which is a fall of 20%. That's not what we would hope to see.

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¥419m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥127m into a profit. In the meantime, we consider the stock very risky. 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. We've identified 2 warning signs with Jiangsu Huahong Technology (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.