We Think Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101) 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.' 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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

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

How Much Debt Does Guangdong Hongtu Technology (holdings)Ltd Carry?

The chart below, which you can click on for greater detail, shows that Guangdong Hongtu Technology (holdings)Ltd had CN¥765.1m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥2.17b in cash, so it actually has CN¥1.41b net cash.

A Look At Guangdong Hongtu Technology (holdings)Ltd's Liabilities

The latest balance sheet data shows that Guangdong Hongtu Technology (holdings)Ltd had liabilities of CN¥3.85b due within a year, and liabilities of CN¥614.1m falling due after that. Offsetting these obligations, it had cash of CN¥2.17b as well as receivables valued at CN¥2.86b due within 12 months. So it actually has CN¥568.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Hongtu Technology (holdings)Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guangdong Hongtu Technology (holdings)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

While Guangdong Hongtu Technology (holdings)Ltd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangdong Hongtu Technology (holdings)Ltd 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. Looking at the most recent three years, Guangdong Hongtu Technology (holdings)Ltd recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Hongtu Technology (holdings)Ltd has net cash of CN¥1.41b, as well as more liquid assets than liabilities. So we don't have any problem with Guangdong Hongtu Technology (holdings)Ltd'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Guangdong Hongtu Technology (holdings)Ltd you should know about.

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.