Is XD (HKG:2400) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 XD Inc. (HKG:2400) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 XD

What Is XD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 XD had CN¥1.91b of debt, an increase on CN¥1.79b, over one year. But it also has CN¥3.73b in cash to offset that, meaning it has CN¥1.82b net cash.

How Healthy Is XD's Balance Sheet?

The latest balance sheet data shows that XD had liabilities of CN¥2.62b due within a year, and liabilities of CN¥177.2m falling due after that. On the other hand, it had cash of CN¥3.73b and CN¥252.7m worth of receivables due within a year. So it can boast CN¥1.19b more liquid assets than total liabilities.

This surplus suggests that XD is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that XD 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 ultimately the future profitability of the business will decide if XD can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year XD wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to CN¥3.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is XD?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that XD had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥419m of cash and made a loss of CN¥77m. Given it only has net cash of CN¥1.82b, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, XD may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like XD I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.