Is Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Hunan Aerospace Huanyu Communication Technology Co.,LTD. (SHSE:688523) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See 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 September 2024, Hunan Aerospace Huanyu Communication TechnologyLTD had CN¥302.1m of debt, up from CN¥270.5m a year ago. Click the image for more detail. However, it does have CN¥502.5m in cash offsetting this, leading to net cash of CN¥200.4m.

A Look At Hunan Aerospace Huanyu Communication TechnologyLTD's Liabilities

We can see from the most recent balance sheet that Hunan Aerospace Huanyu Communication TechnologyLTD had liabilities of CN¥329.1m falling due within a year, and liabilities of CN¥275.5m due beyond that. Offsetting these obligations, it had cash of CN¥502.5m as well as receivables valued at CN¥484.6m due within 12 months. So it can boast CN¥382.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Hunan Aerospace Huanyu Communication TechnologyLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 26% 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 it is future earnings, more than anything, that will determine Hunan Aerospace Huanyu Communication TechnologyLTD's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hunan Aerospace Huanyu Communication 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. During the last three years, Hunan Aerospace Huanyu Communication TechnologyLTD burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hunan Aerospace Huanyu Communication TechnologyLTD has CN¥200.4m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Hunan Aerospace Huanyu Communication TechnologyLTD's balance sheet. 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 2 warning signs for Hunan Aerospace Huanyu Communication TechnologyLTD (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

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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.