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.' 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. As with many other companies Hangzhou Onechance Tech Crop. (SZSE:300792) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

See our latest analysis for Hangzhou Onechance Tech Crop

What Is Hangzhou Onechance Tech Crop's Debt?

The image below, which you can click on for greater detail, shows that Hangzhou Onechance Tech Crop had debt of CN¥35.6m at the end of September 2023, a reduction from CN¥57.0m over a year. However, it does have CN¥900.7m in cash offsetting this, leading to net cash of CN¥865.1m.

How Healthy Is Hangzhou Onechance Tech Crop's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hangzhou Onechance Tech Crop had liabilities of CN¥255.1m due within 12 months and liabilities of CN¥26.7m due beyond that. Offsetting these obligations, it had cash of CN¥900.7m as well as receivables valued at CN¥463.9m due within 12 months. So it actually has CN¥1.08b more liquid assets than total liabilities.

This surplus suggests that Hangzhou Onechance Tech Crop is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hangzhou Onechance Tech Crop has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Hangzhou Onechance Tech Crop's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hangzhou Onechance Tech Crop 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hangzhou Onechance Tech Crop 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. Over the last three years, Hangzhou Onechance Tech Crop saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Onechance Tech Crop has net cash of CN¥865.1m, as well as more liquid assets than liabilities. So we are not troubled with Hangzhou Onechance Tech Crop's debt use. 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 example - Hangzhou Onechance Tech Crop has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.