Is Huabang Technology Holdings (HKG:3638) Using Too Much Debt?

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.' 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. As with many other companies Huabang Technology Holdings Limited (HKG:3638) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Huabang Technology Holdings

What Is Huabang Technology Holdings's Debt?

As you can see below, Huabang Technology Holdings had HK$173.1m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$74.6m in cash offsetting this, leading to net debt of about HK$98.5m.

How Healthy Is Huabang Technology Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Huabang Technology Holdings had liabilities of HK$242.8m due within 12 months and liabilities of HK$8.85m due beyond that. Offsetting this, it had HK$74.6m in cash and HK$80.4m in receivables that were due within 12 months. So its liabilities total HK$96.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Huabang Technology Holdings has a market capitalization of HK$178.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Huabang Technology Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Huabang Technology Holdings made a loss at the EBIT level, and saw its revenue drop to HK$457m, which is a fall of 73%. That makes us nervous, to say the least.

Caveat Emptor

While Huabang Technology Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$92m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$4.6m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Huabang Technology Holdings (including 1 which is a bit concerning) .

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.