We Think Huabang Technology Holdings (HKG:3638) Has A Fair Chunk Of Debt

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.' 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 note that Huabang Technology Holdings Limited (HKG:3638) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Huabang Technology Holdings

How Much Debt Does Huabang Technology Holdings Carry?

As you can see below, Huabang Technology Holdings had HK$177.4m of debt at March 2022, down from HK$346.8m a year prior. On the flip side, it has HK$78.2m in cash leading to net debt of about HK$99.2m.

How Strong Is Huabang Technology Holdings' Balance Sheet?

The latest balance sheet data shows that Huabang Technology Holdings had liabilities of HK$219.9m due within a year, and liabilities of HK$200.0k falling due after that. Offsetting this, it had HK$78.2m in cash and HK$146.8m in receivables that were due within 12 months. So it actually has HK$4.87m more liquid assets than total liabilities.

This short term liquidity is a sign that Huabang Technology Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. 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$1.7b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Huabang Technology Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$246m. 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 a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Huabang Technology Holdings is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.