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

Warren Buffett famously said, '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. We note that Huada Automotive Technology Corp.,Ltd (SHSE:603358) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Huada Automotive TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Huada Automotive TechnologyLtd had debt of CN¥647.6m, up from CN¥436.2m in one year. But it also has CN¥745.8m in cash to offset that, meaning it has CN¥98.1m net cash.

A Look At Huada Automotive TechnologyLtd's Liabilities

The latest balance sheet data shows that Huada Automotive TechnologyLtd had liabilities of CN¥2.23b due within a year, and liabilities of CN¥427.5m falling due after that. Offsetting these obligations, it had cash of CN¥745.8m as well as receivables valued at CN¥1.11b due within 12 months. So it has liabilities totalling CN¥806.6m more than its cash and near-term receivables, combined.

Of course, Huada Automotive TechnologyLtd has a market capitalization of CN¥16.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Huada Automotive TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Huada Automotive TechnologyLtd

Also good is that Huada Automotive TechnologyLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Huada Automotive TechnologyLtd'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 Huada Automotive TechnologyLtd 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, Huada Automotive TechnologyLtd created free cash flow amounting to 7.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Huada Automotive TechnologyLtd has CN¥98.1m in net cash. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Huada Automotive TechnologyLtd'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. For example - Huada Automotive TechnologyLtd has 1 warning sign we think you should be aware of.

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.

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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.