Is Hylink Digital SolutionsLtd (SHSE:603825) Using Too Much Debt?

Warren Buffett famously said, '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 can see that Hylink Digital Solutions Co.,Ltd (SHSE:603825) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hylink Digital SolutionsLtd

What Is Hylink Digital SolutionsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hylink Digital SolutionsLtd had CN¥774.8m of debt, an increase on CN¥567.0m, over one year. However, because it has a cash reserve of CN¥287.4m, its net debt is less, at about CN¥487.5m.

A Look At Hylink Digital SolutionsLtd's Liabilities

We can see from the most recent balance sheet that Hylink Digital SolutionsLtd had liabilities of CN¥1.80b falling due within a year, and liabilities of CN¥194.4m due beyond that. Offsetting these obligations, it had cash of CN¥287.4m as well as receivables valued at CN¥1.41b due within 12 months. So it has liabilities totalling CN¥295.7m more than its cash and near-term receivables, combined.

Of course, Hylink Digital SolutionsLtd has a market capitalization of CN¥3.84b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hylink Digital SolutionsLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Hylink Digital SolutionsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 58%. That makes us nervous, to say the least.

Caveat Emptor

While Hylink Digital SolutionsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥651m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥165m of cash over the last year. So to be blunt we think it is risky. 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 Hylink Digital SolutionsLtd has 2 warning signs (and 1 which is potentially serious) we think 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.