Does Hanwang TechnologyLtd (SZSE:002362) Have A 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Hanwang Technology Co.,Ltd (SZSE:002362) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hanwang TechnologyLtd

What Is Hanwang TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hanwang TechnologyLtd had debt of CN¥113.8m, up from CN¥85.8m in one year. But on the other hand it also has CN¥549.8m in cash, leading to a CN¥436.0m net cash position.

A Look At Hanwang TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Hanwang TechnologyLtd had liabilities of CN¥494.7m falling due within a year, and liabilities of CN¥4.97m due beyond that. Offsetting this, it had CN¥549.8m in cash and CN¥227.1m in receivables that were due within 12 months. So it can boast CN¥277.3m more liquid assets than total liabilities.

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

In the last year Hanwang TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥1.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Hanwang TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Hanwang TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥149m and booked a CN¥120m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥436.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 example - Hanwang TechnologyLtd has 1 warning sign we think you should be aware of.

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.