Is China Technology Industry Group (HKG:8111) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, China Technology Industry Group Limited (HKG:8111) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Technology Industry Group

How Much Debt Does China Technology Industry Group Carry?

You can click the graphic below for the historical numbers, but it shows that China Technology Industry Group had CN¥40.3m of debt in September 2021, down from CN¥69.5m, one year before. On the flip side, it has CN¥1.96m in cash leading to net debt of about CN¥38.3m.

A Look At China Technology Industry Group's Liabilities

We can see from the most recent balance sheet that China Technology Industry Group had liabilities of CN¥89.0m falling due within a year, and liabilities of CN¥25.9m due beyond that. Offsetting this, it had CN¥1.96m in cash and CN¥191.7m in receivables that were due within 12 months. So it actually has CN¥78.8m more liquid assets than total liabilities.

This luscious liquidity implies that China Technology Industry Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Technology Industry Group'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, China Technology Industry Group made a loss at the EBIT level, and saw its revenue drop to CN¥129m, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

Not only did China Technology Industry Group'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 CN¥33m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. To that end, you should learn about the 4 warning signs we've spotted with China Technology Industry Group (including 1 which doesn't sit too well with us) .

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.