Does Hi-Level Technology Holdings (HKG:8113) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Hi-Level Technology Holdings Limited (HKG:8113) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hi-Level Technology Holdings

How Much Debt Does Hi-Level Technology Holdings Carry?

As you can see below, Hi-Level Technology Holdings had HK$220.4m of debt at December 2022, down from HK$302.3m a year prior. However, it does have HK$132.2m in cash offsetting this, leading to net debt of about HK$88.2m.

A Look At Hi-Level Technology Holdings' Liabilities

According to the last reported balance sheet, Hi-Level Technology Holdings had liabilities of HK$385.9m due within 12 months, and liabilities of HK$56.0k due beyond 12 months. On the other hand, it had cash of HK$132.2m and HK$136.2m worth of receivables due within a year. So its liabilities total HK$117.6m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's HK$107.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hi-Level Technology Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hi-Level Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 39%, to HK$1.7b. To be frank that doesn't bode well.

Caveat Emptor

While Hi-Level 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. Its EBIT loss was a whopping HK$61m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$69m. And until that time we think this is a risky stock. 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 Hi-Level Technology Holdings is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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.