These 4 Measures Indicate That Zhejiang HangKe Technology (SHSE:688006) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Zhejiang HangKe Technology Incorporated Company (SHSE:688006) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhejiang HangKe Technology

How Much Debt Does Zhejiang HangKe Technology Carry?

As you can see below, at the end of March 2024, Zhejiang HangKe Technology had CN¥12.1m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥2.83b in cash to offset that, meaning it has CN¥2.81b net cash.

A Look At Zhejiang HangKe Technology's Liabilities

We can see from the most recent balance sheet that Zhejiang HangKe Technology had liabilities of CN¥4.79b falling due within a year, and liabilities of CN¥35.1m due beyond that. On the other hand, it had cash of CN¥2.83b and CN¥2.59b worth of receivables due within a year. So it actually has CN¥597.5m more liquid assets than total liabilities.

This surplus suggests that Zhejiang HangKe Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang HangKe Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Zhejiang HangKe Technology has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang HangKe 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang HangKe 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. Considering the last three years, Zhejiang HangKe Technology actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang HangKe Technology has CN¥2.81b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 60% over the last year. So we are not troubled with Zhejiang HangKe Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zhejiang HangKe Technology that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.