Here's Why Hangzhou Honghua Digital Technology Stock (SHSE:688789) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hangzhou Honghua Digital Technology Stock Company LTD. (SHSE:688789) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hangzhou Honghua Digital Technology Stock

What Is Hangzhou Honghua Digital Technology Stock's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hangzhou Honghua Digital Technology Stock had CN¥337.9m of debt, an increase on CN¥44.9m, over one year. However, it does have CN¥1.23b in cash offsetting this, leading to net cash of CN¥896.4m.

How Healthy Is Hangzhou Honghua Digital Technology Stock's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Honghua Digital Technology Stock had liabilities of CN¥838.0m falling due within a year, and liabilities of CN¥55.8m due beyond that. Offsetting this, it had CN¥1.23b in cash and CN¥703.9m in receivables that were due within 12 months. So it actually has CN¥1.04b more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Honghua Digital Technology Stock could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou Honghua Digital Technology Stock has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Hangzhou Honghua Digital Technology Stock has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. 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 Hangzhou Honghua Digital Technology Stock'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 Hangzhou Honghua Digital Technology Stock 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, Hangzhou Honghua Digital Technology Stock 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 we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Honghua Digital Technology Stock has net cash of CN¥896.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 45% year-on-year EBIT growth. So we don't have any problem with Hangzhou Honghua Digital Technology Stock's use of debt. 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 2 warning signs for Hangzhou Honghua Digital Technology Stock (1 doesn't sit too well with us) you should be aware of.

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.