Health Check: How Prudently Does HongboLtd (SZSE:002229) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Hongbo Co.,Ltd. (SZSE:002229) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HongboLtd

What Is HongboLtd's Net Debt?

As you can see below, at the end of March 2024, HongboLtd had CN¥452.6m of debt, up from CN¥395.0m a year ago. Click the image for more detail. However, it does have CN¥738.2m in cash offsetting this, leading to net cash of CN¥285.6m.

How Healthy Is HongboLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HongboLtd had liabilities of CN¥1.42b due within 12 months and liabilities of CN¥324.9m due beyond that. Offsetting this, it had CN¥738.2m in cash and CN¥303.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥700.5m.

Given HongboLtd has a market capitalization of CN¥5.12b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, HongboLtd 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 you can't view debt in total isolation; since HongboLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year HongboLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥631m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is HongboLtd?

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 HongboLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥281m and booked a CN¥61m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥285.6m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that HongboLtd is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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