Hangzhou Changchuan TechnologyLtd (SZSE:300604) Is Making Moderate Use Of Debt

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. We can see that Hangzhou Changchuan Technology Co.,Ltd (SZSE:300604) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hangzhou Changchuan TechnologyLtd

What Is Hangzhou Changchuan TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, Hangzhou Changchuan TechnologyLtd had CN¥1.18b of debt, up from CN¥516.5m a year ago. Click the image for more detail. However, it does have CN¥686.6m in cash offsetting this, leading to net debt of about CN¥496.6m.

How Healthy Is Hangzhou Changchuan TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Hangzhou Changchuan TechnologyLtd had liabilities of CN¥1.84b due within a year, and liabilities of CN¥570.7m falling due after that. On the other hand, it had cash of CN¥686.6m and CN¥1.25b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥466.9m.

Of course, Hangzhou Changchuan TechnologyLtd has a market capitalization of CN¥20.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hangzhou Changchuan TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hangzhou Changchuan TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥2.0b. We would much prefer see growth.

Caveat Emptor

While Hangzhou Changchuan TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥1.2m. 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¥974m of cash over the last year. So suffice it to say we do consider the stock to be 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 3 warning signs for Hangzhou Changchuan TechnologyLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.