Is Hi-Level Technology Holdings (HKG:8113) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hi-Level Technology Holdings Limited (HKG:8113) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hi-Level Technology Holdings

How Much Debt Does Hi-Level Technology Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Hi-Level Technology Holdings had debt of HK$235.1m, up from HK$181.8m in one year. However, because it has a cash reserve of HK$123.4m, its net debt is less, at about HK$111.6m.

How Strong Is Hi-Level Technology Holdings' Balance Sheet?

According to the balance sheet data, Hi-Level Technology Holdings had liabilities of HK$596.7m due within 12 months, but no longer term liabilities. Offsetting this, it had HK$123.4m in cash and HK$152.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$320.9m.

This deficit casts a shadow over the HK$130.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Hi-Level Technology Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 20%, to HK$2.3b. That's not what we would hope to see.

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. Indeed, it lost a very considerable HK$64m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$63m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Hi-Level Technology Holdings (2 shouldn't be ignored) you should be aware of.

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.