Inventronics (Hangzhou) (SZSE:300582) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Inventronics (Hangzhou), Inc. (SZSE:300582) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Inventronics (Hangzhou)

What Is Inventronics (Hangzhou)'s Net Debt?

As you can see below, Inventronics (Hangzhou) had CN¥876.8m of debt at September 2024, down from CN¥1.18b a year prior. However, because it has a cash reserve of CN¥406.1m, its net debt is less, at about CN¥470.7m.

How Healthy Is Inventronics (Hangzhou)'s Balance Sheet?

According to the last reported balance sheet, Inventronics (Hangzhou) had liabilities of CN¥1.22b due within 12 months, and liabilities of CN¥665.2m due beyond 12 months. Offsetting this, it had CN¥406.1m in cash and CN¥607.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥871.8m.

While this might seem like a lot, it is not so bad since Inventronics (Hangzhou) has a market capitalization of CN¥4.36b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inventronics (Hangzhou) 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.

In the last year Inventronics (Hangzhou) wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥2.8b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Inventronics (Hangzhou) managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥28m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥46m into a profit. So we do think this stock is quite risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Inventronics (Hangzhou) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.