Is AInnovation Technology Group (HKG:2121) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies AInnovation Technology Group Co., Ltd (HKG:2121) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AInnovation Technology Group

How Much Debt Does AInnovation Technology Group Carry?

As you can see below, at the end of December 2023, AInnovation Technology Group had CN¥91.8m of debt, up from CN¥77.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.46b in cash, leading to a CN¥1.37b net cash position.

How Strong Is AInnovation Technology Group's Balance Sheet?

The latest balance sheet data shows that AInnovation Technology Group had liabilities of CN¥865.5m due within a year, and liabilities of CN¥199.5m falling due after that. On the other hand, it had cash of CN¥1.46b and CN¥826.8m worth of receivables due within a year. So it can boast CN¥1.23b more liquid assets than total liabilities.

This excess liquidity is a great indication that AInnovation Technology Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that AInnovation Technology Group 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 AInnovation Technology Group 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 AInnovation Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is AInnovation Technology Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that AInnovation Technology Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥187m of cash and made a loss of CN¥582m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.37b. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for AInnovation Technology Group that you should be aware of.

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.

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.

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