Does Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101) Have A Healthy Balance Sheet?

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.' 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 Guangdong Hongtu Technology (holdings) Co.,Ltd. (SZSE:002101) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Guangdong Hongtu Technology (holdings)Ltd

What Is Guangdong Hongtu Technology (holdings)Ltd's Net Debt?

As you can see below, Guangdong Hongtu Technology (holdings)Ltd had CN¥751.9m of debt at September 2024, down from CN¥1.12b a year prior. But it also has CN¥2.37b in cash to offset that, meaning it has CN¥1.62b net cash.

How Healthy Is Guangdong Hongtu Technology (holdings)Ltd's Balance Sheet?

The latest balance sheet data shows that Guangdong Hongtu Technology (holdings)Ltd had liabilities of CN¥4.77b due within a year, and liabilities of CN¥895.8m falling due after that. Offsetting this, it had CN¥2.37b in cash and CN¥2.90b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥389.6m.

Since publicly traded Guangdong Hongtu Technology (holdings)Ltd shares are worth a total of CN¥8.09b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Guangdong Hongtu Technology (holdings)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Guangdong Hongtu Technology (holdings)Ltd if management cannot prevent a repeat of the 25% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Guangdong Hongtu Technology (holdings)Ltd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guangdong Hongtu Technology (holdings)Ltd 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. Looking at the most recent three years, Guangdong Hongtu Technology (holdings)Ltd recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Guangdong Hongtu Technology (holdings)Ltd has CN¥1.62b in net cash. So we don't have any problem with Guangdong Hongtu Technology (holdings)Ltd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Guangdong Hongtu Technology (holdings)Ltd 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.