David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hangzhou Arcvideo Technology Co., Ltd. (SHSE:688039) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Hangzhou Arcvideo Technology
What Is Hangzhou Arcvideo Technology's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hangzhou Arcvideo Technology had CN¥166.1m of debt, an increase on CN¥85.9m, over one year. However, it does have CN¥302.9m in cash offsetting this, leading to net cash of CN¥136.7m.
A Look At Hangzhou Arcvideo Technology's Liabilities
According to the last reported balance sheet, Hangzhou Arcvideo Technology had liabilities of CN¥316.3m due within 12 months, and liabilities of CN¥16.6m due beyond 12 months. On the other hand, it had cash of CN¥302.9m and CN¥444.9m worth of receivables due within a year. So it can boast CN¥415.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Hangzhou Arcvideo Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hangzhou Arcvideo Technology 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 ultimately the future profitability of the business will decide if Hangzhou Arcvideo Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Hangzhou Arcvideo Technology made a loss at the EBIT level, and saw its revenue drop to CN¥292m, which is a fall of 39%. To be frank that doesn't bode well.
So How Risky Is Hangzhou Arcvideo Technology?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hangzhou Arcvideo Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥223m of cash and made a loss of CN¥153m. With only CN¥136.7m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hangzhou Arcvideo Technology .
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.