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 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Huace Navigation Technology

What Is Shanghai Huace Navigation Technology's Net Debt?

As you can see below, at the end of March 2022, Shanghai Huace Navigation Technology had CN¥191.0m of debt, up from CN¥106.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.10b in cash, so it actually has CN¥912.0m net cash.

A Look At Shanghai Huace Navigation Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai Huace Navigation Technology had liabilities of CN¥836.8m due within 12 months and liabilities of CN¥154.0m due beyond that. On the other hand, it had cash of CN¥1.10b and CN¥733.9m worth of receivables due within a year. So it can boast CN¥846.1m 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. Succinctly put, Shanghai Huace Navigation Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Shanghai Huace Navigation Technology has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanghai Huace Navigation Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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's free cash flow amounted to 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Shanghai Huace Navigation Technology has CN¥912.0m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 8.0% over the last year. So we don't have any problem with Shanghai Huace Navigation Technology's use of debt. 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. For instance, we've identified 3 warning signs for Shanghai Huace Navigation Technology (1 is concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.