Is Technovator International (HKG:1206) Using Debt In A Risky Way?

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.' 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. We note that Technovator International Limited (HKG:1206) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Technovator International

What Is Technovator International's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Technovator International had debt of CN¥285.8m, up from CN¥190.4m in one year. But on the other hand it also has CN¥363.3m in cash, leading to a CN¥77.5m net cash position.

How Strong Is Technovator International's Balance Sheet?

According to the last reported balance sheet, Technovator International had liabilities of CN¥2.61b due within 12 months, and liabilities of CN¥40.1m due beyond 12 months. Offsetting this, it had CN¥363.3m in cash and CN¥2.72b in receivables that were due within 12 months. So it can boast CN¥437.9m more liquid assets than total liabilities.

This luscious liquidity implies that Technovator International's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Technovator International 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 you can't view debt in total isolation; since Technovator International 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, Technovator International reported revenue of CN¥1.8b, which is a gain of 5.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Technovator International?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Technovator International had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥34m of cash and made a loss of CN¥101m. Given it only has net cash of CN¥77.5m, the company may need to raise more capital if it doesn't reach break-even soon. 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. 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. We've identified 2 warning signs with Technovator International (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.