Hangzhou EZVIZ Network (SHSE:688475) Has A Pretty Healthy Balance Sheet

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 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?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hangzhou EZVIZ Network

What Is Hangzhou EZVIZ Network's Net Debt?

The image below, which you can click on for greater detail, shows that Hangzhou EZVIZ Network had debt of CN¥364.8m at the end of March 2024, a reduction from CN¥430.6m over a year. However, it does have CN¥4.39b in cash offsetting this, leading to net cash of CN¥4.02b.

How Strong Is Hangzhou EZVIZ Network's Balance Sheet?

According to the last reported balance sheet, Hangzhou EZVIZ Network had liabilities of CN¥1.98b due within 12 months, and liabilities of CN¥568.5m due beyond 12 months. Offsetting this, it had CN¥4.39b in cash and CN¥832.8m in receivables that were due within 12 months. So it can boast CN¥2.68b more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou EZVIZ Network could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou EZVIZ Network has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Hangzhou EZVIZ Network grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hangzhou EZVIZ Network can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hangzhou EZVIZ Network has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Hangzhou EZVIZ Network created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou EZVIZ Network has CN¥4.02b in net cash and a decent-looking balance sheet. And we liked the look of last year's 72% year-on-year EBIT growth. So is Hangzhou EZVIZ Network's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Hangzhou EZVIZ Network (1 is concerning!) that you should be aware of before investing here.

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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