We Think Han's Laser Technology Industry Group (SZSE:002008) Can Stay On Top Of Its Debt

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.' 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, Han's Laser Technology Industry Group Co., Ltd. (SZSE:002008) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Han's Laser Technology Industry Group

How Much Debt Does Han's Laser Technology Industry Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Han's Laser Technology Industry Group had CN¥5.19b of debt, an increase on CN¥3.44b, over one year. However, its balance sheet shows it holds CN¥8.97b in cash, so it actually has CN¥3.79b net cash.

How Strong Is Han's Laser Technology Industry Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Han's Laser Technology Industry Group had liabilities of CN¥12.7b due within 12 months and liabilities of CN¥2.95b due beyond that. Offsetting these obligations, it had cash of CN¥8.97b as well as receivables valued at CN¥9.00b due within 12 months. So it can boast CN¥2.32b more liquid assets than total liabilities.

This surplus suggests that Han's Laser Technology Industry Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Han's Laser Technology Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Han's Laser Technology Industry Group's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Han's Laser Technology Industry Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Han's Laser Technology Industry Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Han's Laser Technology Industry Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Han's Laser Technology Industry Group has net cash of CN¥3.79b, as well as more liquid assets than liabilities. So we don't have any problem with Han's Laser Technology Industry Group's use of debt. 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. For example - Han's Laser Technology Industry Group has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com