Is Hangzhou Mdk Opto ElectronicsLtd (SHSE:688079) A Risky Investment?

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 note that Hangzhou Mdk Opto Electronics Co.,Ltd. (SHSE:688079) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hangzhou Mdk Opto ElectronicsLtd

What Is Hangzhou Mdk Opto ElectronicsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hangzhou Mdk Opto ElectronicsLtd had CN¥816.3m of debt, an increase on CN¥447.2m, over one year. On the flip side, it has CN¥200.3m in cash leading to net debt of about CN¥616.0m.

A Look At Hangzhou Mdk Opto ElectronicsLtd's Liabilities

According to the last reported balance sheet, Hangzhou Mdk Opto ElectronicsLtd had liabilities of CN¥582.2m due within 12 months, and liabilities of CN¥838.1m due beyond 12 months. Offsetting this, it had CN¥200.3m in cash and CN¥109.4m in receivables that were due within 12 months. So its liabilities total CN¥1.11b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hangzhou Mdk Opto ElectronicsLtd has a market capitalization of CN¥3.78b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hangzhou Mdk Opto ElectronicsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hangzhou Mdk Opto ElectronicsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to CN¥422m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Hangzhou Mdk Opto ElectronicsLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥86m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥656m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. We've identified 2 warning signs with Hangzhou Mdk Opto ElectronicsLtd , 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.