Is Shenzhen Hello Tech Energy (SZSE:301327) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shenzhen Hello Tech Energy Co., Ltd. (SZSE:301327) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen Hello Tech Energy

What Is Shenzhen Hello Tech Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Hello Tech Energy had CN¥252.9m of debt, an increase on CN¥222.6m, over one year. But on the other hand it also has CN¥5.00b in cash, leading to a CN¥4.75b net cash position.

A Look At Shenzhen Hello Tech Energy's Liabilities

According to the last reported balance sheet, Shenzhen Hello Tech Energy had liabilities of CN¥640.5m due within 12 months, and liabilities of CN¥49.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.00b as well as receivables valued at CN¥123.1m due within 12 months. So it can boast CN¥4.44b more liquid assets than total liabilities.

This surplus liquidity suggests that Shenzhen Hello Tech Energy's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Shenzhen Hello Tech Energy boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shenzhen Hello Tech Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Hello Tech Energy had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥2.4b. That's not what we would hope to see.

So How Risky Is Shenzhen Hello Tech Energy?

While Shenzhen Hello Tech Energy lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥28m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. For instance, we've identified 1 warning sign for Shenzhen Hello Tech Energy that you should be aware of.

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.