Haina Intelligent Equipment International Holdings (HKG:1645) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Haina Intelligent Equipment International Holdings Limited (HKG:1645) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Haina Intelligent Equipment International Holdings

How Much Debt Does Haina Intelligent Equipment International Holdings Carry?

As you can see below, at the end of June 2023, Haina Intelligent Equipment International Holdings had CN¥49.9m of debt, up from CN¥30.0m a year ago. Click the image for more detail. But it also has CN¥115.4m in cash to offset that, meaning it has CN¥65.4m net cash.

How Healthy Is Haina Intelligent Equipment International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Haina Intelligent Equipment International Holdings had liabilities of CN¥289.4m falling due within a year, and liabilities of CN¥3.56m due beyond that. On the other hand, it had cash of CN¥115.4m and CN¥113.8m worth of receivables due within a year. So its liabilities total CN¥63.8m more than the combination of its cash and short-term receivables.

Given Haina Intelligent Equipment International Holdings has a market capitalization of CN¥487.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Haina Intelligent Equipment International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Haina Intelligent Equipment International Holdings 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.

Over 12 months, Haina Intelligent Equipment International Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥309m, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is Haina Intelligent Equipment International Holdings?

Although Haina Intelligent Equipment International Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥4.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 Haina Intelligent Equipment International Holdings has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.