Is Hi-Level Technology Holdings (HKG:8113) Using Debt In A Risky Way?

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.' 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.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Hi-Level Technology Holdings

What Is Hi-Level Technology Holdings's Net Debt?

As you can see below, Hi-Level Technology Holdings had HK$107.5m of debt at June 2023, down from HK$235.1m a year prior. But it also has HK$134.4m in cash to offset that, meaning it has HK$26.9m net cash.

A Look At Hi-Level Technology Holdings' Liabilities

According to the last reported balance sheet, Hi-Level Technology Holdings had liabilities of HK$364.8m due within 12 months, and liabilities of HK$43.0k due beyond 12 months. On the other hand, it had cash of HK$134.4m and HK$131.0m worth of receivables due within a year. So its liabilities total HK$99.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$80.9m, we think shareholders really should watch Hi-Level Technology Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Hi-Level Technology Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hi-Level Technology Holdings will need earnings to service that debt. 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 Hi-Level Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 41%, to HK$1.4b. To be frank that doesn't bode well.

So How Risky Is Hi-Level Technology Holdings?

Although Hi-Level Technology Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$163m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Hi-Level Technology Holdings (including 1 which is potentially serious) .

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.