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

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. Importantly, Zhejiang HangKe Technology Incorporated Company (SHSE:688006) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhejiang HangKe Technology

What Is Zhejiang HangKe Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang HangKe Technology had debt of CN¥36.9m, up from none in one year. But it also has CN¥2.96b in cash to offset that, meaning it has CN¥2.93b net cash.

How Healthy Is Zhejiang HangKe Technology's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang HangKe Technology had liabilities of CN¥4.32b falling due within a year, and liabilities of CN¥41.2m due beyond that. Offsetting this, it had CN¥2.96b in cash and CN¥2.36b in receivables that were due within 12 months. So it actually has CN¥963.9m 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. Simply put, the fact that Zhejiang HangKe Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Zhejiang HangKe Technology's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang HangKe Technology 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. Looking at the most recent three years, Zhejiang HangKe Technology recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang HangKe Technology has net cash of CN¥2.93b, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang HangKe Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Zhejiang HangKe Technology has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.