Health Check: How Prudently Does Hangzhou Arcvideo Technology (SHSE:688039) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Hangzhou Arcvideo Technology Co., Ltd. (SHSE:688039) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hangzhou Arcvideo Technology

What Is Hangzhou Arcvideo Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Hangzhou Arcvideo Technology had CN¥94.7m of debt in September 2024, down from CN¥166.1m, one year before. However, its balance sheet shows it holds CN¥142.1m in cash, so it actually has CN¥47.4m net cash.

How Healthy Is Hangzhou Arcvideo Technology's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Arcvideo Technology had liabilities of CN¥230.5m falling due within a year, and liabilities of CN¥11.7m due beyond that. Offsetting this, it had CN¥142.1m in cash and CN¥369.8m in receivables that were due within 12 months. So it actually has CN¥269.7m more liquid assets than total liabilities.

This surplus suggests that Hangzhou Arcvideo Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hangzhou Arcvideo Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hangzhou Arcvideo Technology 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.

Over 12 months, Hangzhou Arcvideo Technology 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.

So How Risky Is Hangzhou Arcvideo Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Hangzhou Arcvideo Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥90m of cash and made a loss of CN¥111m. However, it has net cash of CN¥47.4m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Hangzhou Arcvideo Technology .

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.