Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Jiangsu Huahong Technology Co., Ltd. (SZSE:002645) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Jiangsu Huahong Technology
What Is Jiangsu Huahong Technology's Debt?
As you can see below, at the end of September 2023, Jiangsu Huahong Technology had CN¥1.16b of debt, up from CN¥699.9m a year ago. Click the image for more detail. On the flip side, it has CN¥950.0m in cash leading to net debt of about CN¥205.1m.
How Healthy Is Jiangsu Huahong Technology's Balance Sheet?
The latest balance sheet data shows that Jiangsu Huahong Technology had liabilities of CN¥1.44b due within a year, and liabilities of CN¥753.0m falling due after that. On the other hand, it had cash of CN¥950.0m and CN¥658.9m worth of receivables due within a year. So it has liabilities totalling CN¥580.5m more than its cash and near-term receivables, combined.
Of course, Jiangsu Huahong Technology has a market capitalization of CN¥5.57b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Huahong Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Jiangsu Huahong Technology made a loss at the EBIT level, and saw its revenue drop to CN¥7.3b, which is a fall of 13%. We would much prefer see growth.
Caveat Emptor
While Jiangsu Huahong Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥249m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥99m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Jiangsu Huahong Technology that 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.