Does Huabang Technology Holdings (HKG:3638) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Huabang Technology Holdings Limited (HKG:3638) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Huabang Technology Holdings

How Much Debt Does Huabang Technology Holdings Carry?

The chart below, which you can click on for greater detail, shows that Huabang Technology Holdings had HK$338.8m in debt in September 2021; about the same as the year before. On the flip side, it has HK$92.8m in cash leading to net debt of about HK$246.1m.

How Strong Is Huabang Technology Holdings' Balance Sheet?

According to the last reported balance sheet, Huabang Technology Holdings had liabilities of HK$406.2m due within 12 months, and liabilities of HK$182.0k due beyond 12 months. Offsetting these obligations, it had cash of HK$92.8m as well as receivables valued at HK$323.8m due within 12 months. So it actually has HK$10.2m more liquid assets than total liabilities.

This state of affairs indicates that Huabang Technology Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$1.10b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 Huabang Technology 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.

In the last year Huabang Technology Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 189%, to HK$2.8b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Huabang Technology Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable HK$160m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. Nonetheless, the revenue growth is clearly impressive and that would make it easier to raise capital if need be. So it's risky, but with some potential. 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 2 warning signs for Huabang Technology Holdings (1 shouldn't be ignored) 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.

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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.