Is Hwa Create (SZSE:300045) A Risky Investment?

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. As with many other companies Hwa Create Corporation (SZSE:300045) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hwa Create

What Is Hwa Create's Debt?

The image below, which you can click on for greater detail, shows that Hwa Create had debt of CN¥23.2m at the end of September 2024, a reduction from CN¥53.8m over a year. But on the other hand it also has CN¥224.8m in cash, leading to a CN¥201.6m net cash position.

How Strong Is Hwa Create's Balance Sheet?

According to the last reported balance sheet, Hwa Create had liabilities of CN¥610.5m due within 12 months, and liabilities of CN¥112.2m due beyond 12 months. Offsetting this, it had CN¥224.8m in cash and CN¥519.6m in receivables that were due within 12 months. So it actually has CN¥21.7m more liquid assets than total liabilities.

This state of affairs indicates that Hwa Create's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥13.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Hwa Create has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hwa Create can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hwa Create wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to CN¥738m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hwa Create?

While Hwa Create lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥108m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 46% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. For riskier companies like Hwa Create 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.