Is Hangzhou Raycloud TechnologyLtd (SHSE:688365) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) does use debt in its business. But the real question is whether this debt is making the company risky.

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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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Hangzhou Raycloud TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hangzhou Raycloud TechnologyLtd had debt of CN¥173.5m, up from CN¥150.4m in one year. However, it does have CN¥286.2m in cash offsetting this, leading to net cash of CN¥112.7m.

How Healthy Is Hangzhou Raycloud TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Hangzhou Raycloud TechnologyLtd had liabilities of CN¥536.6m due within a year, and liabilities of CN¥162.1m falling due after that. Offsetting this, it had CN¥286.2m in cash and CN¥65.0m in receivables that were due within 12 months. So its liabilities total CN¥347.6m more than the combination of its cash and short-term receivables.

Since publicly traded Hangzhou Raycloud TechnologyLtd shares are worth a total of CN¥5.64b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hangzhou Raycloud TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Hangzhou Raycloud TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for Hangzhou Raycloud TechnologyLtd

Over 12 months, Hangzhou Raycloud TechnologyLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Hangzhou Raycloud TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥34m of cash and made a loss of CN¥83m. But the saving grace is the CN¥112.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Hangzhou Raycloud TechnologyLtd has 1 warning sign we think you should be aware of.

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.