Does Sichuan Huafeng Technology (SHSE:688629) Have A Healthy Balance Sheet?

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.' 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. We can see that Sichuan Huafeng Technology Co., LTD. (SHSE:688629) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Sichuan Huafeng Technology

What Is Sichuan Huafeng Technology's Debt?

As you can see below, Sichuan Huafeng Technology had CN¥296.9m of debt, at March 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¥858.7m in cash, leading to a CN¥561.8m net cash position.

How Strong Is Sichuan Huafeng Technology's Balance Sheet?

According to the last reported balance sheet, Sichuan Huafeng Technology had liabilities of CN¥517.6m due within 12 months, and liabilities of CN¥528.3m due beyond 12 months. Offsetting this, it had CN¥858.7m in cash and CN¥734.5m in receivables that were due within 12 months. So it can boast CN¥547.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Sichuan Huafeng Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sichuan Huafeng Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sichuan Huafeng Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Sichuan Huafeng Technology made a loss at the EBIT level, and saw its revenue drop to CN¥951m, which is a fall of 6.2%. We would much prefer see growth.

So How Risky Is Sichuan Huafeng Technology?

While Sichuan Huafeng Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥71m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sichuan Huafeng Technology (of which 1 can't be ignored!) you should know about.

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.

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