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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hua Ying Technology (Gruop) Co., Ltd. (SZSE:000536) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hua Ying Technology (Gruop)

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

The image below, which you can click on for greater detail, shows that Hua Ying Technology (Gruop) had debt of CN¥2.77b at the end of September 2024, a reduction from CN¥3.64b over a year. However, because it has a cash reserve of CN¥734.6m, its net debt is less, at about CN¥2.04b.

A Look At Hua Ying Technology (Gruop)'s Liabilities

We can see from the most recent balance sheet that Hua Ying Technology (Gruop) had liabilities of CN¥3.20b falling due within a year, and liabilities of CN¥1.61b due beyond that. On the other hand, it had cash of CN¥734.6m and CN¥153.9m worth of receivables due within a year. So its liabilities total CN¥3.92b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hua Ying Technology (Gruop) has a market capitalization of CN¥17.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hua Ying Technology (Gruop)'s earnings that will influence how the balance sheet holds up in the future. 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) wasn't profitable at an EBIT level, but managed to grow its revenue by 74%, to CN¥2.0b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Hua Ying Technology (Gruop) still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥1.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥1.4b into a profit. So to be blunt we do think it is 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 1 warning sign with Hua Ying Technology (Gruop) , 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.