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.' 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. We can see that Shanghai Huace Navigation Technology Ltd (SZSE:300627) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanghai Huace Navigation Technology

How Much Debt Does Shanghai Huace Navigation Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Shanghai Huace Navigation Technology had CN¥236.7m of debt, an increase on CN¥190.4m, over one year. But it also has CN¥993.0m in cash to offset that, meaning it has CN¥756.2m net cash.

A Look At Shanghai Huace Navigation Technology's Liabilities

The latest balance sheet data shows that Shanghai Huace Navigation Technology had liabilities of CN¥1.04b due within a year, and liabilities of CN¥109.9m falling due after that. On the other hand, it had cash of CN¥993.0m and CN¥844.0m worth of receivables due within a year. So it can boast CN¥690.0m more liquid assets than total liabilities.

This surplus suggests that Shanghai Huace Navigation Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Huace Navigation Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shanghai Huace Navigation Technology's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Shanghai Huace Navigation Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Huace Navigation Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Shanghai Huace Navigation Technology created free cash flow amounting to 4.7% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Huace Navigation Technology has CN¥756.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Shanghai Huace Navigation Technology's use of debt. 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 3 warning signs for Shanghai Huace Navigation Technology (of which 1 is a bit unpleasant!) you should know about.

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.