Does Hangzhou EZVIZ Network (SHSE:688475) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hangzhou EZVIZ Network Co., Ltd. (SHSE:688475) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hangzhou EZVIZ Network

How Much Debt Does Hangzhou EZVIZ Network Carry?

As you can see below, at the end of September 2023, Hangzhou EZVIZ Network had CN¥543.0m of debt, up from CN¥429.2m a year ago. Click the image for more detail. But it also has CN¥4.58b in cash to offset that, meaning it has CN¥4.04b net cash.

A Look At Hangzhou EZVIZ Network's Liabilities

According to the last reported balance sheet, Hangzhou EZVIZ Network had liabilities of CN¥2.05b due within 12 months, and liabilities of CN¥509.4m due beyond 12 months. Offsetting this, it had CN¥4.58b in cash and CN¥806.6m in receivables that were due within 12 months. So it can boast CN¥2.83b more liquid assets than total liabilities.

This surplus suggests that Hangzhou EZVIZ Network has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hangzhou EZVIZ Network boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Hangzhou EZVIZ Network grew its EBIT by 122% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hangzhou EZVIZ Network'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hangzhou EZVIZ Network may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Hangzhou EZVIZ Network recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou EZVIZ Network has CN¥4.04b in net cash and a decent-looking balance sheet. And we liked the look of last year's 122% year-on-year EBIT growth. So we don't think Hangzhou EZVIZ Network's use of debt is risky. 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 instance, we've identified 1 warning sign for Hangzhou EZVIZ Network that 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.