XtalPi Holdings (HKG:2228) Has Debt But No Earnings; Should You Worry?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, XtalPi Holdings Limited (HKG:2228) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for XtalPi Holdings

What Is XtalPi Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that XtalPi Holdings had CN¥64.9m of debt in June 2024, down from CN¥9.36b, one year before. But on the other hand it also has CN¥3.39b in cash, leading to a CN¥3.32b net cash position.

A Look At XtalPi Holdings' Liabilities

The latest balance sheet data shows that XtalPi Holdings had liabilities of CN¥223.9m due within a year, and liabilities of CN¥97.2m falling due after that. On the other hand, it had cash of CN¥3.39b and CN¥76.5m worth of receivables due within a year. So it can boast CN¥3.14b more liquid assets than total liabilities.

This surplus suggests that XtalPi Holdings 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. Succinctly put, XtalPi 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 future earnings, more than anything, that will determine XtalPi Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, XtalPi Holdings reported revenue of CN¥197m, 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 XtalPi Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year XtalPi Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥684m of cash and made a loss of CN¥2.5b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.32b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, XtalPi Holdings may be on a path to profitability. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for XtalPi Holdings that you should be aware of before investing here.

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.