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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Yuxing InfoTech Investment Holdings Limited (HKG:8005) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Yuxing InfoTech Investment Holdings's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Yuxing InfoTech Investment Holdings had debt of HK$190.1m, up from HK$131.6m in one year. But it also has HK$393.8m in cash to offset that, meaning it has HK$203.6m net cash.
A Look At Yuxing InfoTech Investment Holdings' Liabilities
According to the last reported balance sheet, Yuxing InfoTech Investment Holdings had liabilities of HK$323.7m due within 12 months, and liabilities of HK$24.6m due beyond 12 months. Offsetting these obligations, it had cash of HK$393.8m as well as receivables valued at HK$278.7m due within 12 months. So it can boast HK$324.2m more liquid assets than total liabilities.
This surplus strongly suggests that Yuxing InfoTech Investment Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Yuxing InfoTech Investment Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yuxing InfoTech Investment Holdings'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 Yuxing InfoTech Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to HK$263m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Yuxing InfoTech Investment Holdings?
While Yuxing InfoTech Investment Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$4.8m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Yuxing InfoTech Investment Holdings is showing 2 warning signs in our investment analysis , 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.
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.
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