Warren Buffett famously said, '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 note that Han's Laser Technology Industry Group Co., Ltd. (SZSE:002008) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Han's Laser Technology Industry Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Han's Laser Technology Industry Group had debt of CN¥6.20b, up from CN¥5.50b in one year. However, it does have CN¥9.23b in cash offsetting this, leading to net cash of CN¥3.03b.

A Look At Han's Laser Technology Industry Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Han's Laser Technology Industry Group had liabilities of CN¥14.7b due within 12 months and liabilities of CN¥3.09b due beyond that. Offsetting these obligations, it had cash of CN¥9.23b as well as receivables valued at CN¥9.49b due within 12 months. So it actually has CN¥897.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Han's Laser Technology Industry Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Han's Laser Technology Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Han's Laser Technology Industry Group if management cannot prevent a repeat of the 60% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Han's Laser Technology Industry Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Han's Laser Technology Industry Group 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, Han's Laser Technology Industry Group created free cash flow amounting to 12% 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 Han's Laser Technology Industry Group has CN¥3.03b in net cash and a decent-looking balance sheet. So we don't have any problem with Han's Laser Technology Industry Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Han's Laser Technology Industry Group , and understanding them should be part of your investment process.

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.