Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Huitongda Network Co., Ltd. (HKG:9878) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Huitongda Network's Net Debt?
The image below, which you can click on for greater detail, shows that Huitongda Network had debt of CN¥626.8m at the end of December 2023, a reduction from CN¥706.8m over a year. However, it does have CN¥7.03b in cash offsetting this, leading to net cash of CN¥6.41b.
How Strong Is Huitongda Network's Balance Sheet?
The latest balance sheet data shows that Huitongda Network had liabilities of CN¥19.3b due within a year, and liabilities of CN¥298.3m falling due after that. Offsetting these obligations, it had cash of CN¥7.03b as well as receivables valued at CN¥3.63b due within 12 months. So its liabilities total CN¥8.96b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Huitongda Network has a market capitalization of CN¥15.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Huitongda Network also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Huitongda Network grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Huitongda Network'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Huitongda Network 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 most recent three years, Huitongda Network recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While Huitongda Network does have more liabilities than liquid assets, it also has net cash of CN¥6.41b. And we liked the look of last year's 47% year-on-year EBIT growth. So we don't think Huitongda Network's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Huitongda Network .
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.
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.