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.' 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 AInnovation Technology Group Co., Ltd (HKG:2121) makes use of debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 AInnovation Technology Group
What Is AInnovation Technology Group's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2024 AInnovation Technology Group had debt of CN¥126.5m, up from CN¥110.3m in one year. But on the other hand it also has CN¥1.40b in cash, leading to a CN¥1.28b net cash position.
How Healthy Is AInnovation Technology Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AInnovation Technology Group had liabilities of CN¥775.9m due within 12 months and liabilities of CN¥201.4m due beyond that. Offsetting this, it had CN¥1.40b in cash and CN¥606.3m in receivables that were due within 12 months. So it can boast CN¥1.03b more liquid assets than total liabilities.
This surplus strongly suggests that AInnovation Technology Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that AInnovation Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 AInnovation Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year AInnovation Technology Group had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥1.4b. That makes us nervous, to say the least.
So How Risky Is AInnovation Technology Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AInnovation Technology Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥99m of cash and made a loss of CN¥582m. But the saving grace is the CN¥1.28b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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 3 warning signs we've spotted with AInnovation Technology Group .
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.