Is Henan Carve Electronics Technology (SZSE:301182) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Henan Carve Electronics Technology Co., Ltd. (SZSE:301182) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Henan Carve Electronics Technology

How Much Debt Does Henan Carve Electronics Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Henan Carve Electronics Technology had CN¥135.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥139.4m in cash, so it actually has CN¥3.51m net cash.

How Healthy Is Henan Carve Electronics Technology's Balance Sheet?

According to the last reported balance sheet, Henan Carve Electronics Technology had liabilities of CN¥935.3m due within 12 months, and liabilities of CN¥59.2m due beyond 12 months. On the other hand, it had cash of CN¥139.4m and CN¥364.1m worth of receivables due within a year. So its liabilities total CN¥491.0m more than the combination of its cash and short-term receivables.

Given Henan Carve Electronics Technology has a market capitalization of CN¥3.73b, 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. While it does have liabilities worth noting, Henan Carve Electronics Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Henan Carve Electronics Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Henan Carve Electronics Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to CN¥798m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Henan Carve Electronics Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Henan Carve Electronics Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥193m of cash and made a loss of CN¥65m. With only CN¥3.51m on the balance sheet, it would appear that its going to need to raise capital again soon. Henan Carve Electronics 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. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Henan Carve Electronics 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.