Would Haina Intelligent Equipment International Holdings (HKG:1645) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Haina Intelligent Equipment International Holdings Limited (HKG:1645) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Haina Intelligent Equipment International Holdings

What Is Haina Intelligent Equipment International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Haina Intelligent Equipment International Holdings had debt of CN¥77.0m, up from CN¥25.0m in one year. On the flip side, it has CN¥72.2m in cash leading to net debt of about CN¥4.80m.

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

The latest balance sheet data shows that Haina Intelligent Equipment International Holdings had liabilities of CN¥360.7m due within a year, and liabilities of CN¥11.8m falling due after that. On the other hand, it had cash of CN¥72.2m and CN¥102.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥197.7m.

This deficit isn't so bad because Haina Intelligent Equipment International Holdings is worth CN¥727.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Carrying virtually no net debt, Haina Intelligent Equipment International Holdings has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Haina Intelligent Equipment International Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥351m. That's not what we would hope to see.

Caveat Emptor

While Haina Intelligent Equipment International Holdings'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¥22m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥67m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 1 warning sign for Haina Intelligent Equipment International Holdings that you should be aware of.

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.