Is Hua Ying Technology (Gruop) (SZSE:000536) Using Too Much Debt?

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, Hua Ying Technology (Gruop) Co., Ltd. (SZSE:000536) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hua Ying Technology (Gruop)

What Is Hua Ying Technology (Gruop)'s Debt?

The chart below, which you can click on for greater detail, shows that Hua Ying Technology (Gruop) had CN¥3.57b in debt in March 2024; about the same as the year before. However, it does have CN¥1.04b in cash offsetting this, leading to net debt of about CN¥2.54b.

How Healthy Is Hua Ying Technology (Gruop)'s Balance Sheet?

The latest balance sheet data shows that Hua Ying Technology (Gruop) had liabilities of CN¥3.82b due within a year, and liabilities of CN¥1.23b falling due after that. Offsetting these obligations, it had cash of CN¥1.04b as well as receivables valued at CN¥215.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.80b.

This is a mountain of leverage relative to its market capitalization of CN¥5.86b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hua Ying Technology (Gruop) will need earnings to service that debt. 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 Hua Ying Technology (Gruop) had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.6b. We would much prefer see growth.

Caveat Emptor

While Hua Ying Technology (Gruop)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.3b. 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. However, it doesn't help that it burned through CN¥370m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Hua Ying Technology (Gruop) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.