Is Sichuan Huafeng Technology (SHSE:688629) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sichuan Huafeng Technology Co., LTD. (SHSE:688629) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sichuan Huafeng Technology

What Is Sichuan Huafeng Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Sichuan Huafeng Technology had CN¥318.4m of debt, an increase on CN¥297.3m, over one year. However, it does have CN¥548.4m in cash offsetting this, leading to net cash of CN¥230.0m.

A Look At Sichuan Huafeng Technology's Liabilities

We can see from the most recent balance sheet that Sichuan Huafeng Technology had liabilities of CN¥667.3m falling due within a year, and liabilities of CN¥526.1m due beyond that. Offsetting this, it had CN¥548.4m in cash and CN¥675.8m in receivables that were due within 12 months. So it can boast CN¥30.9m more liquid assets than total liabilities.

This state of affairs indicates that Sichuan Huafeng Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥17.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 it is future earnings, more than anything, that will determine Sichuan Huafeng Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sichuan Huafeng Technology reported revenue of CN¥972m, which is a gain of 6.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Sichuan Huafeng Technology?

Although Sichuan Huafeng Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥17m. So taking that on face value, and considering the cash, we don't think its very risky in the near 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Sichuan Huafeng Technology (including 2 which are a bit concerning) .

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.