Hangzhou Jizhi Mechatronic (SZSE:300553) Is Making Moderate Use Of Debt

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. As with many other companies Hangzhou Jizhi Mechatronic Co., Ltd. (SZSE:300553) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Hangzhou Jizhi Mechatronic

How Much Debt Does Hangzhou Jizhi Mechatronic Carry?

As you can see below, at the end of September 2024, Hangzhou Jizhi Mechatronic had CN¥383.7m of debt, up from CN¥116.5m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥303.0m, its net debt is less, at about CN¥80.7m.

How Strong Is Hangzhou Jizhi Mechatronic's Balance Sheet?

The latest balance sheet data shows that Hangzhou Jizhi Mechatronic had liabilities of CN¥283.9m due within a year, and liabilities of CN¥341.7m falling due after that. Offsetting this, it had CN¥303.0m in cash and CN¥212.5m in receivables that were due within 12 months. So its liabilities total CN¥110.1m more than the combination of its cash and short-term receivables.

Since publicly traded Hangzhou Jizhi Mechatronic shares are worth a total of CN¥3.71b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hangzhou Jizhi Mechatronic 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.

Over 12 months, Hangzhou Jizhi Mechatronic made a loss at the EBIT level, and saw its revenue drop to CN¥235m, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

While Hangzhou Jizhi Mechatronic'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¥4.4m. 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. Another cause for caution is that is bled CN¥117m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Hangzhou Jizhi Mechatronic has 3 warning signs (and 1 which is concerning) we think you should know about.

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.