We Think Han's Laser Technology Industry Group (SZSE:002008) Is Taking Some Risk With 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Han's Laser Technology Industry Group Co., Ltd. (SZSE:002008) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Han's Laser Technology Industry Group

What Is Han's Laser Technology Industry Group's Debt?

As you can see below, Han's Laser Technology Industry Group had CN¥4.92b of debt at September 2024, down from CN¥6.20b a year prior. However, it does have CN¥7.30b in cash offsetting this, leading to net cash of CN¥2.38b.

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

According to the last reported balance sheet, Han's Laser Technology Industry Group had liabilities of CN¥12.5b due within 12 months, and liabilities of CN¥3.70b due beyond 12 months. Offsetting this, it had CN¥7.30b in cash and CN¥9.96b in receivables that were due within 12 months. So it can boast CN¥1.09b more liquid assets than total liabilities.

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

On the other hand, Han's Laser Technology Industry Group's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Han's Laser Technology Industry Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Han's Laser Technology Industry Group 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. During the last three years, Han's Laser Technology Industry Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

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¥2.38b, as well as more liquid assets than liabilities. So while Han's Laser Technology Industry Group does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 2 warning signs for Han's Laser Technology Industry Group (1 doesn't sit too well with us) 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.