Is Hi-Target Navigation TechLtd (SZSE:300177) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Hi-Target Navigation Tech Co.,Ltd (SZSE:300177) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Hi-Target Navigation TechLtd

What Is Hi-Target Navigation TechLtd's Debt?

As you can see below, Hi-Target Navigation TechLtd had CN¥499.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥403.6m in cash offsetting this, leading to net debt of about CN¥96.1m.

How Healthy Is Hi-Target Navigation TechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hi-Target Navigation TechLtd had liabilities of CN¥1.41b due within 12 months and liabilities of CN¥89.1m due beyond that. Offsetting these obligations, it had cash of CN¥403.6m as well as receivables valued at CN¥1.20b due within 12 months. So it actually has CN¥103.8m more liquid assets than total liabilities.

This state of affairs indicates that Hi-Target Navigation TechLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥11.1b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Hi-Target Navigation TechLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Hi-Target Navigation TechLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hi-Target Navigation TechLtd had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥1.0b. That makes us nervous, to say the least.

Caveat Emptor

While Hi-Target Navigation TechLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥524m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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. Case in point: We've spotted 2 warning signs for Hi-Target Navigation TechLtd you should be aware of.

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.