Is Guangdong Huicheng Vacuum Technology (SZSE:301392) A Risky Investment?

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. As with many other companies Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guangdong Huicheng Vacuum Technology

What Is Guangdong Huicheng Vacuum Technology's Debt?

As you can see below, at the end of June 2024, Guangdong Huicheng Vacuum Technology had CN¥125.5m of debt, up from CN¥119.3m a year ago. Click the image for more detail. However, it does have CN¥358.3m in cash offsetting this, leading to net cash of CN¥232.8m.

A Look At Guangdong Huicheng Vacuum Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong Huicheng Vacuum Technology had liabilities of CN¥342.6m due within 12 months and liabilities of CN¥60.7m due beyond that. Offsetting this, it had CN¥358.3m in cash and CN¥268.8m in receivables that were due within 12 months. So it actually has CN¥223.8m more liquid assets than total liabilities.

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

Also good is that Guangdong Huicheng Vacuum Technology grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangdong Huicheng Vacuum Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guangdong Huicheng Vacuum Technology 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 most recent three years, Guangdong Huicheng Vacuum Technology recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Huicheng Vacuum Technology has net cash of CN¥232.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So is Guangdong Huicheng Vacuum Technology's debt a risk? It doesn't seem so to us. 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 instance, we've identified 3 warning signs for Guangdong Huicheng Vacuum Technology that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.