Is Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) Using Too Much Debt?

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.' 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. Importantly, Hunan Aerospace Huanyu Communication Technology Co.,LTD. (SHSE:688523) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Hunan Aerospace Huanyu Communication TechnologyLTD Carry?

As you can see below, Hunan Aerospace Huanyu Communication TechnologyLTD had CN¥302.3m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥502.5m in cash, leading to a CN¥200.2m net cash position.

How Healthy Is Hunan Aerospace Huanyu Communication TechnologyLTD's Balance Sheet?

According to the last reported balance sheet, Hunan Aerospace Huanyu Communication TechnologyLTD had liabilities of CN¥329.1m due within 12 months, and liabilities of CN¥275.5m due beyond 12 months. 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 actually has CN¥382.4m 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. Succinctly put, Hunan Aerospace Huanyu Communication TechnologyLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Hunan Aerospace Huanyu Communication TechnologyLTD

While Hunan Aerospace Huanyu Communication TechnologyLTD doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Hunan Aerospace Huanyu Communication TechnologyLTD 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, 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. Over the last three years, Hunan Aerospace Huanyu Communication TechnologyLTD saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥200.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Hunan Aerospace Huanyu Communication TechnologyLTD's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hunan Aerospace Huanyu Communication TechnologyLTD has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.