Is Hwa Create (SZSE:300045) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hwa Create Corporation (SZSE:300045) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hwa Create

How Much Debt Does Hwa Create Carry?

You can click the graphic below for the historical numbers, but it shows that Hwa Create had CN¥53.8m of debt in September 2023, down from CN¥72.2m, one year before. However, it does have CN¥141.6m in cash offsetting this, leading to net cash of CN¥87.8m.

How Healthy Is Hwa Create's Balance Sheet?

We can see from the most recent balance sheet that Hwa Create had liabilities of CN¥526.8m falling due within a year, and liabilities of CN¥80.4m due beyond that. On the other hand, it had cash of CN¥141.6m and CN¥800.3m worth of receivables due within a year. So it can boast CN¥334.7m more liquid assets than total liabilities.

This surplus suggests that Hwa Create has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hwa Create boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hwa Create's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hwa Create reported revenue of CN¥505m, 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 Hwa Create?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Hwa Create had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥117m and booked a CN¥75m accounting loss. However, it has net cash of CN¥87.8m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hwa Create you should know about.

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.