Shaanxi Huada Science TechnologyLtd (SZSE:301517) Takes On Some Risk With Its Use Of Debt

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.' 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. We note that Shaanxi Huada Science Technology Co.,Ltd. (SZSE:301517) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shaanxi Huada Science TechnologyLtd

What Is Shaanxi Huada Science TechnologyLtd's Debt?

As you can see below, Shaanxi Huada Science TechnologyLtd had CN¥333.7m of debt at March 2024, down from CN¥412.8m a year prior. However, its balance sheet shows it holds CN¥592.3m in cash, so it actually has CN¥258.6m net cash.

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

According to the last reported balance sheet, Shaanxi Huada Science TechnologyLtd had liabilities of CN¥754.8m due within 12 months, and liabilities of CN¥182.0m due beyond 12 months. Offsetting this, it had CN¥592.3m in cash and CN¥904.0m in receivables that were due within 12 months. So it can boast CN¥559.5m 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!

But the bad news is that Shaanxi Huada Science TechnologyLtd has seen its EBIT plunge 20% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shaanxi Huada Science TechnologyLtd can strengthen its balance sheet over time. 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. 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. During the last three years, Shaanxi Huada Science TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shaanxi Huada Science TechnologyLtd has net cash of CN¥258.6m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Shaanxi Huada Science TechnologyLtd's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Shaanxi Huada Science TechnologyLtd (including 1 which is concerning) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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