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.' 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. We can see that Huaqin Technology Co., Ltd. (SHSE:603296) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Huaqin Technology's Debt?
As you can see below, Huaqin Technology had CN¥6.08b of debt at March 2024, down from CN¥15.2b a year prior. However, its balance sheet shows it holds CN¥15.5b in cash, so it actually has CN¥9.42b net cash.
How Healthy Is Huaqin Technology's Balance Sheet?
The latest balance sheet data shows that Huaqin Technology had liabilities of CN¥28.7b due within a year, and liabilities of CN¥1.80b falling due after that. Offsetting this, it had CN¥15.5b in cash and CN¥14.3b in receivables that were due within 12 months. So its liabilities total CN¥709.6m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Huaqin Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥52.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Huaqin Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Huaqin Technology grew its EBIT by 62% 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 ultimately the future profitability of the business will decide if Huaqin Technology 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Huaqin 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. Looking at the most recent three years, Huaqin Technology recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
We could understand if investors are concerned about Huaqin Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥9.42b. And we liked the look of last year's 62% year-on-year EBIT growth. So is Huaqin Technology's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Huaqin Technology, you may well want to click here to check an interactive graph of its earnings per share history.
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.