Is Huabang Technology Holdings (HKG:3638) A Risky Investment?

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.' 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 Huabang Technology Holdings Limited (HKG:3638) does use debt in its business. But is this debt a concern to shareholders?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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. However, because it has a cash reserve of HK$92.8m, its net debt is less, at about HK$246.1m.

A Look At Huabang Technology Holdings' Liabilities

The latest balance sheet data shows that Huabang Technology Holdings had liabilities of HK$406.2m due within a year, and liabilities of HK$182.0k falling due after that. On the other hand, it had cash of HK$92.8m and HK$323.8m worth of receivables due within a year. So it actually has HK$10.2m more liquid assets than total liabilities.

This surplus suggests that Huabang Technology Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Huabang Technology Holdings 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, Huabang Technology Holdings reported revenue of HK$2.8b, which is a gain of 189%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Huabang Technology Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$161m. 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. Having said that the rate of revenue growth will likely impress the market, greatly facilitating any potential capital raising, if required. Despite that strong positive, this one could still be considered a bit too risky, by some. 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 instance, we've identified 3 warning signs for Huabang Technology Holdings (1 shouldn't be ignored) 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.

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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.