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. Importantly, Technovator International Limited (HKG:1206) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Technovator International
What Is Technovator International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Technovator International had CN¥284.8m of debt, an increase on CN¥210.7m, over one year. On the flip side, it has CN¥111.1m in cash leading to net debt of about CN¥173.7m.
How Strong Is Technovator International's Balance Sheet?
The latest balance sheet data shows that Technovator International had liabilities of CN¥2.35b due within a year, and liabilities of CN¥39.1m falling due after that. Offsetting this, it had CN¥111.1m in cash and CN¥2.58b in receivables that were due within 12 months. So it actually has CN¥298.3m more liquid assets than total liabilities.
This surplus strongly suggests that Technovator International has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Technovator International will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Technovator International wasn't profitable at an EBIT level, but managed to grow its revenue by 6.7%, to CN¥1.8b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Technovator International produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥153m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Be aware that Technovator International is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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.