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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. 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?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yuxing InfoTech Investment Holdings

What Is Yuxing InfoTech Investment Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Yuxing InfoTech Investment Holdings had debt of HK$12.3m at the end of June 2023, a reduction from HK$37.0m over a year. But on the other hand it also has HK$200.0m in cash, leading to a HK$187.7m net cash position.

How Strong 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$324.7m falling due within a year, and liabilities of HK$53.8m due beyond that. Offsetting these obligations, it had cash of HK$200.0m as well as receivables valued at HK$148.0m due within 12 months. So it has liabilities totalling HK$30.5m more than its cash and near-term receivables, combined.

Of course, Yuxing InfoTech Investment Holdings has a market capitalization of HK$320.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Yuxing InfoTech Investment Holdings also has more cash than debt, so we're pretty confident 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.

Over 12 months, Yuxing InfoTech Investment Holdings made a loss at the EBIT level, and saw its revenue drop to HK$169m, which is a fall of 9.4%. That's not what we would hope to see.

So How Risky Is Yuxing InfoTech Investment Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$25m of cash and made a loss of HK$189m. While this does make the company a bit risky, it's important to remember it has net cash of HK$187.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Yuxing InfoTech Investment Holdings has 3 warning signs (and 1 which is a bit concerning) we think 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.