We Think Hangzhou Huaxing Chuangye Communication Technology (SZSE:300025) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 Huaxing Chuangye Communication Technology

How Much Debt Does Hangzhou Huaxing Chuangye Communication Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Hangzhou Huaxing Chuangye Communication Technology had debt of CN¥154.7m, up from CN¥98.1m in one year. However, it does have CN¥119.5m in cash offsetting this, leading to net debt of about CN¥35.2m.

How Strong Is Hangzhou Huaxing Chuangye Communication Technology's Balance Sheet?

According to the last reported balance sheet, Hangzhou Huaxing Chuangye Communication Technology had liabilities of CN¥322.2m due within 12 months, and liabilities of CN¥6.54m due beyond 12 months. Offsetting these obligations, it had cash of CN¥119.5m as well as receivables valued at CN¥454.3m due within 12 months. So it actually has CN¥245.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Huaxing Chuangye Communication Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Hangzhou Huaxing Chuangye Communication Technology has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hangzhou Huaxing Chuangye Communication 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.

In the last year Hangzhou Huaxing Chuangye Communication Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 3.9%, to CN¥711m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Hangzhou Huaxing Chuangye Communication Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥36m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hangzhou Huaxing Chuangye Communication Technology (of which 1 shouldn't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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