Is Hang Zhou Radical Energy-Saving Technology (SZSE:300652) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hang Zhou Radical Energy-Saving Technology Co., Ltd. (SZSE:300652) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hang Zhou Radical Energy-Saving Technology

What Is Hang Zhou Radical Energy-Saving Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hang Zhou Radical Energy-Saving Technology had debt of CN¥20.1m, up from CN¥5.15m in one year. However, it does have CN¥662.8m in cash offsetting this, leading to net cash of CN¥642.7m.

How Healthy Is Hang Zhou Radical Energy-Saving Technology's Balance Sheet?

The latest balance sheet data shows that Hang Zhou Radical Energy-Saving Technology had liabilities of CN¥382.9m due within a year, and liabilities of CN¥4.66m falling due after that. On the other hand, it had cash of CN¥662.8m and CN¥176.5m worth of receivables due within a year. So it actually has CN¥451.7m more liquid assets than total liabilities.

This surplus suggests that Hang Zhou Radical Energy-Saving Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hang Zhou Radical Energy-Saving Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Hang Zhou Radical Energy-Saving Technology grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hang Zhou Radical Energy-Saving Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hang Zhou Radical Energy-Saving 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, Hang Zhou Radical Energy-Saving Technology recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hang Zhou Radical Energy-Saving Technology has CN¥642.7m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 14% in the last twelve months. So is Hang Zhou Radical Energy-Saving Technology'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. For example, we've discovered 2 warning signs for Hang Zhou Radical Energy-Saving Technology (1 is a bit unpleasant!) that you should be aware of before investing here.

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.