Is Yuxing InfoTech Investment Holdings (HKG:8005) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Yuxing InfoTech Investment Holdings Limited (HKG:8005) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yuxing InfoTech Investment Holdings

How Much Debt Does Yuxing InfoTech Investment Holdings Carry?

The image below, which you can click on for greater detail, shows that Yuxing InfoTech Investment Holdings had debt of HK$37.0m at the end of June 2022, a reduction from HK$190.1m over a year. But on the other hand it also has HK$458.8m in cash, leading to a HK$421.7m net cash position.

A Look At Yuxing InfoTech Investment Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Yuxing InfoTech Investment Holdings had liabilities of HK$412.1m due within 12 months and liabilities of HK$24.4m due beyond that. Offsetting this, it had HK$458.8m in cash and HK$572.6m in receivables that were due within 12 months. So it can boast HK$594.8m more liquid assets than total liabilities.

This luscious liquidity implies that Yuxing InfoTech Investment Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yuxing InfoTech Investment Holdings 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 Yuxing InfoTech Investment Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Yuxing InfoTech Investment Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to HK$187m. To be frank that doesn't bode well.

So How Risky Is Yuxing InfoTech Investment Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Yuxing InfoTech Investment Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$300m of cash and made a loss of HK$208m. While this does make the company a bit risky, it's important to remember it has net cash of HK$421.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 4 warning signs we've spotted with Yuxing InfoTech Investment Holdings (including 3 which are a bit unpleasant) .

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.