Is Hubei Zhongyi Technology (SZSE:301150) Using Debt Sensibly?

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.' 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. As with many other companies Hubei Zhongyi Technology Inc. (SZSE:301150) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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 Hubei Zhongyi Technology

What Is Hubei Zhongyi Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hubei Zhongyi Technology had CN¥530.6m of debt, an increase on CN¥150.0m, over one year. But on the other hand it also has CN¥2.04b in cash, leading to a CN¥1.51b net cash position.

How Strong Is Hubei Zhongyi Technology's Balance Sheet?

According to the last reported balance sheet, Hubei Zhongyi Technology had liabilities of CN¥2.34b due within 12 months, and liabilities of CN¥117.4m due beyond 12 months. Offsetting this, it had CN¥2.04b in cash and CN¥1.98b in receivables that were due within 12 months. So it can boast CN¥1.57b more liquid assets than total liabilities.

This luscious liquidity implies that Hubei Zhongyi Technology's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Hubei Zhongyi Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Hubei Zhongyi Technology'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.

Over 12 months, Hubei Zhongyi Technology reported revenue of CN¥4.5b, which is a gain of 36%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hubei Zhongyi Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hubei Zhongyi Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥230m and booked a CN¥40m accounting loss. Given it only has net cash of CN¥1.51b, the company may need to raise more capital if it doesn't reach break-even soon. Hubei Zhongyi Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hubei Zhongyi Technology you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.