Does Huizhou Speed Wireless TechnologyLtd (SZSE:300322) 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.' 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, Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Huizhou Speed Wireless TechnologyLtd

What Is Huizhou Speed Wireless TechnologyLtd's Debt?

As you can see below, Huizhou Speed Wireless TechnologyLtd had CN¥1.11b 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¥318.3m in cash offsetting this, leading to net debt of about CN¥793.4m.

A Look At Huizhou Speed Wireless TechnologyLtd's Liabilities

According to the last reported balance sheet, Huizhou Speed Wireless TechnologyLtd had liabilities of CN¥1.62b due within 12 months, and liabilities of CN¥227.3m due beyond 12 months. Offsetting this, it had CN¥318.3m in cash and CN¥893.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥639.3m more than its cash and near-term receivables, combined.

Given Huizhou Speed Wireless TechnologyLtd has a market capitalization of CN¥6.81b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Huizhou Speed Wireless TechnologyLtd shareholders face the double whammy of a high net debt to EBITDA ratio (8.2), and fairly weak interest coverage, since EBIT is just 0.28 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Huizhou Speed Wireless TechnologyLtd is that it turned last year's EBIT loss into a gain of CN¥6.9m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Huizhou Speed Wireless TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Huizhou Speed Wireless TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Huizhou Speed Wireless TechnologyLtd's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its level of total liabilities is a good sign, and makes us more optimistic. Looking at the bigger picture, it seems clear to us that Huizhou Speed Wireless TechnologyLtd's use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. We've identified 2 warning signs with Huizhou Speed Wireless TechnologyLtd , 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.