Is China Harzone Industry (SZSE:300527) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies China Harzone Industry Corp., Ltd (SZSE:300527) makes use of debt. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is China Harzone Industry's Debt?

As you can see below, at the end of September 2024, China Harzone Industry had CN¥342.4m of debt, up from CN¥329.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.22b in cash, so it actually has CN¥878.0m net cash.

How Strong Is China Harzone Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Harzone Industry had liabilities of CN¥746.2m due within 12 months and liabilities of CN¥458.8m due beyond that. Offsetting this, it had CN¥1.22b in cash and CN¥782.2m in receivables that were due within 12 months. So it actually has CN¥797.6m more liquid assets than total liabilities.

This surplus suggests that China Harzone Industry has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Harzone Industry has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is China Harzone Industry'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.

See our latest analysis for China Harzone Industry

In the last year China Harzone Industry had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥987m. That's not what we would hope to see.

So How Risky Is China Harzone Industry?

Although China Harzone Industry had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥1.1m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for China Harzone Industry (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.