Is Huazhang Technology Holding (HKG:1673) A Risky Investment?

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.' 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. Importantly, Huazhang Technology Holding Limited (HKG:1673) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Huazhang Technology Holding

What Is Huazhang Technology Holding's Debt?

As you can see below, at the end of June 2024, Huazhang Technology Holding had CN¥86.4m of debt, up from CN¥82.1m a year ago. Click the image for more detail. However, it does have CN¥208.6m in cash offsetting this, leading to net cash of CN¥122.1m.

How Healthy Is Huazhang Technology Holding's Balance Sheet?

We can see from the most recent balance sheet that Huazhang Technology Holding had liabilities of CN¥533.7m falling due within a year, and liabilities of CN¥24.4m due beyond that. On the other hand, it had cash of CN¥208.6m and CN¥217.4m worth of receivables due within a year. So its liabilities total CN¥132.1m more than the combination of its cash and short-term receivables.

Huazhang Technology Holding has a market capitalization of CN¥436.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Huazhang Technology Holding boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Huazhang Technology Holding'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, Huazhang Technology Holding made a loss at the EBIT level, and saw its revenue drop to CN¥448m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is Huazhang Technology Holding?

While Huazhang Technology Holding lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥16m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 3 warning signs for Huazhang Technology Holding (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.