Would Huizhou Speed Wireless TechnologyLtd (SZSE:300322) Be Better Off With Less Debt?

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 Huizhou Speed Wireless TechnologyLtd

What Is Huizhou Speed Wireless TechnologyLtd's Debt?

As you can see below, at the end of March 2024, Huizhou Speed Wireless TechnologyLtd had CN¥1.04b of debt, up from CN¥995.3m a year ago. Click the image for more detail. However, it does have CN¥402.5m in cash offsetting this, leading to net debt of about CN¥632.8m.

How Strong Is Huizhou Speed Wireless TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Huizhou Speed Wireless TechnologyLtd had liabilities of CN¥1.38b falling due within a year, and liabilities of CN¥306.2m due beyond that. Offsetting this, it had CN¥402.5m in cash and CN¥711.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥576.4m more than its cash and near-term receivables, combined.

Since publicly traded Huizhou Speed Wireless TechnologyLtd shares are worth a total of CN¥4.10b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Huizhou Speed Wireless TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥1.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Huizhou Speed Wireless TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥80m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥220m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Huizhou Speed Wireless TechnologyLtd is showing 3 warning signs in our investment analysis , and 2 of those are significant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com