Is Yuxing InfoTech Investment Holdings (HKG:8005) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Yuxing InfoTech Investment Holdings Limited (HKG:8005) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yuxing InfoTech Investment Holdings

How Much Debt Does Yuxing InfoTech Investment Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Yuxing InfoTech Investment Holdings had HK$55.8m of debt in December 2021, down from HK$148.8m, one year before. But on the other hand it also has HK$484.1m in cash, leading to a HK$428.3m net cash position.

How Healthy Is Yuxing InfoTech Investment Holdings' Balance Sheet?

We can see from the most recent balance sheet that Yuxing InfoTech Investment Holdings had liabilities of HK$389.3m falling due within a year, and liabilities of HK$25.9m due beyond that. On the other hand, it had cash of HK$484.1m and HK$392.3m worth of receivables due within a year. So it actually has HK$461.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Yuxing InfoTech Investment Holdings' balance sheet is almost as strong as Fort Knox. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Yuxing InfoTech Investment Holdings made a loss at the EBIT level, and saw its revenue drop to HK$161m, which is a fall of 48%. To be frank that doesn't bode well.

So How Risky Is Yuxing InfoTech Investment Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Yuxing InfoTech Investment Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$201m of cash and made a loss of HK$198m. While this does make the company a bit risky, it's important to remember it has net cash of HK$428.3m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Yuxing InfoTech Investment Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.