Would Huabang Technology Holdings (HKG:3638) Be Better Off With Less 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. Importantly, Huabang Technology Holdings Limited (HKG:3638) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Huabang Technology Holdings's Net Debt?

As you can see below, Huabang Technology Holdings had HK$162.6m of debt at September 2022, down from HK$338.8m a year prior. However, because it has a cash reserve of HK$106.6m, its net debt is less, at about HK$56.0m.

How Healthy Is Huabang Technology Holdings' Balance Sheet?

According to the last reported balance sheet, Huabang Technology Holdings had liabilities of HK$233.2m due within 12 months, and liabilities of HK$639.0k due beyond 12 months. Offsetting these obligations, it had cash of HK$106.6m as well as receivables valued at HK$76.8m due within 12 months. So it has liabilities totalling HK$50.4m more than its cash and near-term receivables, combined.

Of course, Huabang Technology Holdings has a market capitalization of HK$363.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In the last year Huabang Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 79%, to HK$586m. To be frank that doesn't bode well.

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). Indeed, it lost a very considerable HK$255m 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. For example, we would not want to see a repeat of last year's loss of HK$242m. So we do think this stock is quite risky. 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. We've identified 4 warning signs with Huabang Technology Holdings (at least 2 which shouldn't be ignored) , 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.