Is China Harzone Industry (SZSE:300527) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Harzone Industry

What Is China Harzone Industry's Debt?

As you can see below, at the end of March 2024, China Harzone Industry had CN¥332.5m of debt, up from CN¥318.5m a year ago. Click the image for more detail. However, it does have CN¥1.47b in cash offsetting this, leading to net cash of CN¥1.14b.

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¥789.2m due within 12 months and liabilities of CN¥440.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.47b as well as receivables valued at CN¥559.4m due within 12 months. So it can boast CN¥800.6m more liquid assets than total liabilities.

This short term liquidity is a sign that China Harzone Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, China Harzone Industry made a loss at the EBIT level, and saw its revenue drop to CN¥641m, which is a fall of 62%. To be frank that doesn't bode well.

So How Risky Is China Harzone Industry?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China Harzone Industry had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥112m of cash and made a loss of CN¥209m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.14b. That means it could keep spending at its current rate for more than two years. 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. 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 1 warning sign with China Harzone Industry , and understanding them should be part of your investment process.

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.