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.' 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 Hanwang Technology Co.,Ltd (SZSE:002362) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Hanwang TechnologyLtd
What Is Hanwang TechnologyLtd's Net Debt?
The chart below, which you can click on for greater detail, shows that Hanwang TechnologyLtd had CN¥82.8m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds CN¥706.7m in cash, so it actually has CN¥623.8m net cash.
How Healthy Is Hanwang TechnologyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hanwang TechnologyLtd had liabilities of CN¥420.0m due within 12 months and liabilities of CN¥10.3m due beyond that. Offsetting this, it had CN¥706.7m in cash and CN¥218.1m in receivables that were due within 12 months. So it can boast CN¥494.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Hanwang TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hanwang TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hanwang TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Hanwang TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to CN¥1.4b. That's not what we would hope to see.
So How Risky Is Hanwang TechnologyLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Hanwang TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥96m and booked a CN¥142m accounting loss. Given it only has net cash of CN¥623.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example - Hanwang TechnologyLtd has 1 warning sign we think 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.