Is Hangzhou Shenhao TechnologyLTD (SZSE:300853) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Hangzhou Shenhao Technology Co.,LTD. (SZSE:300853) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Hangzhou Shenhao TechnologyLTD

What Is Hangzhou Shenhao TechnologyLTD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hangzhou Shenhao TechnologyLTD had CN¥580.8m of debt, an increase on CN¥470.5m, over one year. On the flip side, it has CN¥428.5m in cash leading to net debt of about CN¥152.3m.

A Look At Hangzhou Shenhao TechnologyLTD's Liabilities

The latest balance sheet data shows that Hangzhou Shenhao TechnologyLTD had liabilities of CN¥371.5m due within a year, and liabilities of CN¥502.7m falling due after that. On the other hand, it had cash of CN¥428.5m and CN¥462.0m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Hangzhou Shenhao TechnologyLTD'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¥3.91b company is short on cash, but still worth keeping an eye on the balance sheet. 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 Shenhao 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 Hangzhou Shenhao TechnologyLTD had a loss before interest and tax, and actually shrunk its revenue by 67%, to CN¥155m. That makes us nervous, to say the least.

Caveat Emptor

While Hangzhou Shenhao TechnologyLTD'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¥272m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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 3 warning signs with Hangzhou Shenhao TechnologyLTD , and understanding them should be part of your investment process.

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.

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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.