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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sichuan Huafeng Technology Co., LTD. (SHSE:688629) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sichuan Huafeng Technology

What Is Sichuan Huafeng Technology's Net Debt?

As you can see below, at the end of September 2024, Sichuan Huafeng Technology had CN¥306.6m of debt, up from CN¥292.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥457.4m in cash, so it actually has CN¥150.7m net cash.

How Strong Is Sichuan Huafeng Technology's Balance Sheet?

According to the last reported balance sheet, Sichuan Huafeng Technology had liabilities of CN¥714.8m due within 12 months, and liabilities of CN¥511.9m due beyond 12 months. Offsetting this, it had CN¥457.4m in cash and CN¥709.2m in receivables that were due within 12 months. So its liabilities total CN¥60.1m more than the combination of its cash and short-term receivables.

Having regard to Sichuan Huafeng Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥17.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Sichuan Huafeng Technology also has more cash than debt, so we're pretty confident 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'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¥1.0b, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sichuan Huafeng Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sichuan Huafeng Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥195m and booked a CN¥16m accounting loss. With only CN¥150.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Sichuan Huafeng Technology that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.