Is Hygon Information Technology (SHSE:688041) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Hygon Information Technology Co., Ltd. (SHSE:688041) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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 Hygon Information Technology

What Is Hygon Information Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hygon Information Technology had debt of CN¥3.22b, up from CN¥1.63b in one year. But on the other hand it also has CN¥9.04b in cash, leading to a CN¥5.81b net cash position.

How Strong Is Hygon Information Technology's Balance Sheet?

According to the last reported balance sheet, Hygon Information Technology had liabilities of CN¥3.47b due within 12 months, and liabilities of CN¥1.57b due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.04b as well as receivables valued at CN¥1.03b due within 12 months. So it actually has CN¥5.03b more liquid assets than total liabilities.

This state of affairs indicates that Hygon Information Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥340.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Hygon Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Hygon Information Technology grew its EBIT by 114% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hygon Information Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hygon Information Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Hygon Information Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hygon Information Technology has CN¥5.81b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 114% over the last year. So we are not troubled with Hygon Information Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Hygon Information Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.