Does Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Hunan Aerospace Huanyu Communication Technology Co.,LTD. (SHSE:688523) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hunan Aerospace Huanyu Communication TechnologyLTD

What Is Hunan Aerospace Huanyu Communication TechnologyLTD's Debt?

As you can see below, at the end of March 2024, Hunan Aerospace Huanyu Communication TechnologyLTD had CN¥270.5m of debt, up from CN¥238.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥728.8m in cash, so it actually has CN¥458.3m net cash.

A Look At Hunan Aerospace Huanyu Communication TechnologyLTD's Liabilities

The latest balance sheet data shows that Hunan Aerospace Huanyu Communication TechnologyLTD had liabilities of CN¥248.5m due within a year, and liabilities of CN¥306.7m falling due after that. Offsetting these obligations, it had cash of CN¥728.8m as well as receivables valued at CN¥408.6m due within 12 months. So it can boast CN¥582.3m more liquid assets than total liabilities.

This surplus suggests that Hunan Aerospace Huanyu Communication TechnologyLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hunan Aerospace Huanyu Communication TechnologyLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Hunan Aerospace Huanyu Communication TechnologyLTD's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hunan Aerospace Huanyu Communication TechnologyLTD 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hunan Aerospace Huanyu Communication 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. Over the last three years, Hunan Aerospace Huanyu Communication TechnologyLTD saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hunan Aerospace Huanyu Communication TechnologyLTD has net cash of CN¥458.3m, as well as more liquid assets than liabilities. So while Hunan Aerospace Huanyu Communication TechnologyLTD does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Hunan Aerospace Huanyu Communication TechnologyLTD is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com