Does Hangzhou Raycloud TechnologyLtd (SHSE:688365) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hangzhou Raycloud TechnologyLtd

What Is Hangzhou Raycloud TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hangzhou Raycloud TechnologyLtd had CN¥186.6m of debt, an increase on CN¥128.8m, over one year. But it also has CN¥305.9m in cash to offset that, meaning it has CN¥119.2m net cash.

How Healthy Is Hangzhou Raycloud TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hangzhou Raycloud TechnologyLtd had liabilities of CN¥526.4m due within 12 months and liabilities of CN¥170.6m due beyond that. On the other hand, it had cash of CN¥305.9m and CN¥75.6m worth of receivables due within a year. So it has liabilities totalling CN¥315.6m more than its cash and near-term receivables, combined.

Given Hangzhou Raycloud TechnologyLtd has a market capitalization of CN¥4.02b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Hangzhou Raycloud TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hangzhou Raycloud TechnologyLtd'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.

In the last year Hangzhou Raycloud TechnologyLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Hangzhou Raycloud TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Hangzhou Raycloud TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥65m of cash and made a loss of CN¥8.3m. But the saving grace is the CN¥119.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Hangzhou Raycloud TechnologyLtd you should be aware of.

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.