Is HAND Enterprise Solutions (SZSE:300170) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, HAND Enterprise Solutions Co., Ltd. (SZSE:300170) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HAND Enterprise Solutions

What Is HAND Enterprise Solutions's Debt?

The image below, which you can click on for greater detail, shows that HAND Enterprise Solutions had debt of CN¥497.1m at the end of March 2024, a reduction from CN¥1.47b over a year. But on the other hand it also has CN¥1.47b in cash, leading to a CN¥969.8m net cash position.

How Strong Is HAND Enterprise Solutions' Balance Sheet?

According to the last reported balance sheet, HAND Enterprise Solutions had liabilities of CN¥979.5m due within 12 months, and liabilities of CN¥113.8m due beyond 12 months. Offsetting this, it had CN¥1.47b in cash and CN¥1.59b in receivables that were due within 12 months. So it actually has CN¥1.96b more liquid assets than total liabilities.

This luscious liquidity implies that HAND Enterprise Solutions' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that HAND Enterprise Solutions has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is HAND Enterprise Solutions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year HAND Enterprise Solutions'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 HAND Enterprise Solutions?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months HAND Enterprise Solutions lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥126m and booked a CN¥6.6m accounting loss. With only CN¥969.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with HAND Enterprise Solutions , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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