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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Holitech Technology Co., Ltd. (SZSE:002217) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Holitech Technology Carry?
You can click the graphic below for the historical numbers, but it shows that Holitech Technology had CN¥7.60b of debt in September 2023, down from CN¥11.6b, one year before. On the flip side, it has CN¥1.19b in cash leading to net debt of about CN¥6.41b.
A Look At Holitech Technology's Liabilities
Zooming in on the latest balance sheet data, we can see that Holitech Technology had liabilities of CN¥12.3b due within 12 months and liabilities of CN¥2.06b due beyond that. On the other hand, it had cash of CN¥1.19b and CN¥2.14b worth of receivables due within a year. So it has liabilities totalling CN¥11.1b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥4.14b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Holitech Technology would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Holitech Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Holitech Technology had a loss before interest and tax, and actually shrunk its revenue by 48%, to CN¥7.0b. To be frank that doesn't bode well.
Caveat Emptor
While Holitech 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. Its EBIT loss was a whopping CN¥3.7b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥5.2b in the last year. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Holitech Technology you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.