Is Hangzhou EZVIZ Network (SHSE:688475) A Risky Investment?

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. As with many other companies Hangzhou EZVIZ Network Co., Ltd. (SHSE:688475) makes use of debt. But should shareholders be worried about its use of debt?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See 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¥331.4m at the end of June 2024, a reduction from CN¥481.6m over a year. But it also has CN¥4.13b in cash to offset that, meaning it has CN¥3.80b net cash.

How Healthy Is Hangzhou EZVIZ Network's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hangzhou EZVIZ Network had liabilities of CN¥2.13b due within 12 months and liabilities of CN¥578.8m due beyond that. Offsetting these obligations, it had cash of CN¥4.13b as well as receivables valued at CN¥951.6m due within 12 months. So it actually has CN¥2.37b 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. Succinctly put, Hangzhou EZVIZ Network boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Hangzhou EZVIZ Network has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Hangzhou EZVIZ Network created free cash flow amounting to 12% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou EZVIZ Network has CN¥3.80b in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hangzhou EZVIZ Network (of which 1 makes us a bit uncomfortable!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.