Huada Automotive TechnologyLtd (SHSE:603358) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Huada Automotive Technology Corp.,Ltd (SHSE:603358) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Huada Automotive TechnologyLtd

What Is Huada Automotive TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Huada Automotive TechnologyLtd had CN¥540.6m of debt, an increase on CN¥382.6m, over one year. However, it does have CN¥1.06b in cash offsetting this, leading to net cash of CN¥516.1m.

A Look At Huada Automotive TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Huada Automotive TechnologyLtd had liabilities of CN¥2.44b falling due within a year, and liabilities of CN¥400.0m due beyond that. Offsetting this, it had CN¥1.06b in cash and CN¥1.46b in receivables that were due within 12 months. So its liabilities total CN¥320.9m more than the combination of its cash and short-term receivables.

Given Huada Automotive TechnologyLtd has a market capitalization of CN¥13.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Huada Automotive TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Huada Automotive TechnologyLtd grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 Huada Automotive TechnologyLtd 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. Huada Automotive TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Huada Automotive TechnologyLtd created free cash flow amounting to 14% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Huada Automotive TechnologyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥516.1m. And we liked the look of last year's 34% year-on-year EBIT growth. So is Huada Automotive TechnologyLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Huada Automotive TechnologyLtd , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.