Is Shaanxi Huada Science TechnologyLtd (SZSE:301517) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shaanxi Huada Science Technology Co.,Ltd. (SZSE:301517) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Shaanxi Huada Science TechnologyLtd

How Much Debt Does Shaanxi Huada Science TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that Shaanxi Huada Science TechnologyLtd had debt of CN¥338.6m at the end of June 2024, a reduction from CN¥422.8m over a year. But on the other hand it also has CN¥655.1m in cash, leading to a CN¥316.5m net cash position.

How Strong Is Shaanxi Huada Science TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shaanxi Huada Science TechnologyLtd had liabilities of CN¥675.5m due within 12 months and liabilities of CN¥208.5m due beyond that. Offsetting these obligations, it had cash of CN¥655.1m as well as receivables valued at CN¥776.6m due within 12 months. So it actually has CN¥547.8m more liquid assets than total liabilities.

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

It is just as well that Shaanxi Huada Science TechnologyLtd's load is not too heavy, because its EBIT was down 61% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shaanxi Huada Science TechnologyLtd'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. Shaanxi Huada Science TechnologyLtd 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 last three years, Shaanxi Huada Science TechnologyLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shaanxi Huada Science TechnologyLtd has CN¥316.5m in net cash and a decent-looking balance sheet. So while Shaanxi Huada Science TechnologyLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shaanxi Huada Science TechnologyLtd (of which 1 can't be ignored!) you should know about.

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.