Is Shenzhen Han's CNC Technology (SZSE:301200) Using Too Much Debt?

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. Importantly, Shenzhen Han's CNC Technology Co., Ltd. (SZSE:301200) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen Han's CNC Technology

What Is Shenzhen Han's CNC Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen Han's CNC Technology had CN¥49.0m of debt, an increase on CN¥39.0m, over one year. But on the other hand it also has CN¥1.17b in cash, leading to a CN¥1.13b net cash position.

How Strong Is Shenzhen Han's CNC Technology's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Han's CNC Technology had liabilities of CN¥1.69b falling due within a year, and liabilities of CN¥80.8m due beyond that. On the other hand, it had cash of CN¥1.17b and CN¥2.73b worth of receivables due within a year. So it actually has CN¥2.13b more liquid assets than total liabilities.

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

In fact Shenzhen Han's CNC Technology's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Shenzhen Han's CNC Technology'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 Shenzhen Han's CNC Technology 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. In the last three years, Shenzhen Han's CNC Technology's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Han's CNC Technology has net cash of CN¥1.13b, as well as more liquid assets than liabilities. So we don't have any problem with Shenzhen Han's CNC Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shenzhen Han's CNC Technology 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.