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.' 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. We can see that Hylink Digital Solutions Co.,Ltd (SHSE:603825) does use debt in its business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Hylink Digital SolutionsLtd
What Is Hylink Digital SolutionsLtd's Debt?
The image below, which you can click on for greater detail, shows that Hylink Digital SolutionsLtd had debt of CN¥990.1m at the end of March 2023, a reduction from CN¥1.78b over a year. However, it does have CN¥347.7m in cash offsetting this, leading to net debt of about CN¥642.4m.
A Look At Hylink Digital SolutionsLtd's Liabilities
The latest balance sheet data shows that Hylink Digital SolutionsLtd had liabilities of CN¥3.77b due within a year, and liabilities of CN¥139.5m falling due after that. Offsetting this, it had CN¥347.7m in cash and CN¥3.75b in receivables that were due within 12 months. So it can boast CN¥195.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Hylink Digital SolutionsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hylink Digital SolutionsLtd 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 Hylink Digital SolutionsLtd had a loss before interest and tax, and actually shrunk its revenue by 43%, to CN¥7.7b. That makes us nervous, to say the least.
Caveat Emptor
Not only did Hylink Digital SolutionsLtd'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¥461m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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. For instance, we've identified 3 warning signs for Hylink Digital SolutionsLtd (1 doesn't sit too well with us) you should be aware of.
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.