Hangzhou Lion ElectronicsLtd (SHSE:605358) Is Making Moderate Use Of 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 Hangzhou Lion Electronics Co.,Ltd (SHSE:605358) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hangzhou Lion ElectronicsLtd

What Is Hangzhou Lion ElectronicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hangzhou Lion ElectronicsLtd had CN¥7.30b of debt, an increase on CN¥6.69b, over one year. On the flip side, it has CN¥2.70b in cash leading to net debt of about CN¥4.60b.

How Healthy Is Hangzhou Lion ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that Hangzhou Lion ElectronicsLtd had liabilities of CN¥2.69b due within a year, and liabilities of CN¥6.52b falling due after that. Offsetting these obligations, it had cash of CN¥2.70b as well as receivables valued at CN¥1.44b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.06b.

While this might seem like a lot, it is not so bad since Hangzhou Lion ElectronicsLtd has a market capitalization of CN¥14.3b, 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 it is future earnings, more than anything, that will determine Hangzhou Lion ElectronicsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hangzhou Lion ElectronicsLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Hangzhou Lion ElectronicsLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥162m. 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. Another cause for caution is that is bled CN¥310m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 example, we've discovered 1 warning sign for Hangzhou Lion ElectronicsLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.