Is Yuxing InfoTech Investment Holdings (HKG:8005) Weighed On By Its Debt Load?

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 note that Yuxing InfoTech Investment Holdings Limited (HKG:8005) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yuxing InfoTech Investment Holdings

What Is Yuxing InfoTech Investment Holdings's Debt?

As you can see below, Yuxing InfoTech Investment Holdings had HK$16.4m of debt at December 2022, down from HK$55.8m a year prior. But on the other hand it also has HK$264.1m in cash, leading to a HK$247.7m net cash position.

How Healthy Is Yuxing InfoTech Investment Holdings' Balance Sheet?

According to the last reported balance sheet, Yuxing InfoTech Investment Holdings had liabilities of HK$376.1m due within 12 months, and liabilities of HK$53.0m due beyond 12 months. Offsetting these obligations, it had cash of HK$264.1m as well as receivables valued at HK$199.2m due within 12 months. So it actually has HK$34.2m more liquid assets than total liabilities.

This surplus suggests that Yuxing InfoTech Investment Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yuxing InfoTech Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yuxing InfoTech Investment Holdings will need earnings to service that debt. 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 reported revenue of HK$206m, which is a gain of 28%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Yuxing InfoTech Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Yuxing InfoTech Investment Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$82m of cash and made a loss of HK$245m. But the saving grace is the HK$247.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Yuxing InfoTech Investment Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 3 warning signs for Yuxing InfoTech Investment Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.