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.' 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. As with many other companies Hanwang Technology Co.,Ltd (SZSE:002362) makes use of debt. But should shareholders be worried about its use of debt?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Hanwang TechnologyLtd's Debt?
The chart below, which you can click on for greater detail, shows that Hanwang TechnologyLtd had CN¥85.8m in debt in September 2023; about the same as the year before. But it also has CN¥664.5m in cash to offset that, meaning it has CN¥578.7m net cash.
How Healthy Is Hanwang TechnologyLtd's Balance Sheet?
We can see from the most recent balance sheet that Hanwang TechnologyLtd had liabilities of CN¥415.9m falling due within a year, and liabilities of CN¥5.53m due beyond that. On the other hand, it had cash of CN¥664.5m and CN¥193.4m worth of receivables due within a year. So it actually has CN¥436.4m 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. Simply put, the fact that Hanwang TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hanwang TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Hanwang TechnologyLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is Hanwang TechnologyLtd?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hanwang TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥103m and booked a CN¥180m accounting loss. But the saving grace is the CN¥578.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Hanwang TechnologyLtd .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.