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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Yuxing InfoTech Investment Holdings Limited (HKG:8005) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Yuxing InfoTech Investment Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Yuxing InfoTech Investment Holdings had debt of HK$14.0m, up from HK$12.3m in one year. However, it does have HK$74.9m in cash offsetting this, leading to net cash of HK$60.9m.

How Healthy Is Yuxing InfoTech Investment Holdings' Balance Sheet?

According to the last reported balance sheet, Yuxing InfoTech Investment Holdings had liabilities of HK$280.8m due within 12 months, and liabilities of HK$36.9m due beyond 12 months. On the other hand, it had cash of HK$74.9m and HK$131.5m worth of receivables due within a year. So it has liabilities totalling HK$111.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Yuxing InfoTech Investment Holdings is worth HK$403.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 you can't view debt in total isolation; since Yuxing InfoTech Investment Holdings will need earnings to service that debt. 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.

Over 12 months, Yuxing InfoTech Investment Holdings reported revenue of HK$278m, which is a gain of 64%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Yuxing InfoTech Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. 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$7.7m of cash and made a loss of HK$56m. But the saving grace is the HK$60.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Yuxing InfoTech Investment Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Yuxing InfoTech Investment Holdings (1 is significant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.