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 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 note that Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Hangzhou Raycloud TechnologyLtd
What Is Hangzhou Raycloud TechnologyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Hangzhou Raycloud TechnologyLtd had debt of CN¥187.3m, up from CN¥128.6m in one year. However, it does have CN¥413.2m in cash offsetting this, leading to net cash of CN¥225.9m.
A Look At Hangzhou Raycloud TechnologyLtd's Liabilities
The latest balance sheet data shows that Hangzhou Raycloud TechnologyLtd had liabilities of CN¥387.8m due within a year, and liabilities of CN¥145.9m falling due after that. Offsetting this, it had CN¥413.2m in cash and CN¥72.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥48.4m.
Having regard to Hangzhou Raycloud TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.16b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hangzhou Raycloud 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 Hangzhou Raycloud 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.
Over 12 months, Hangzhou Raycloud TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥476m, which is a fall of 8.3%. That's not what we would hope to see.
So How Risky Is Hangzhou Raycloud TechnologyLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Hangzhou Raycloud TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥70m of cash and made a loss of CN¥159m. Given it only has net cash of CN¥225.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 2 warning signs for Hangzhou Raycloud TechnologyLtd you should be aware of.
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.