Here's Why HMT (Xiamen) New Technical Materials (SHSE:603306) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 HMT (Xiamen) New Technical Materials Co., Ltd (SHSE:603306) does use debt in its business. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for HMT (Xiamen) New Technical Materials

What Is HMT (Xiamen) New Technical Materials's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 HMT (Xiamen) New Technical Materials had debt of CN¥798.4m, up from none in one year. However, its balance sheet shows it holds CN¥1.44b in cash, so it actually has CN¥642.5m net cash.

How Healthy Is HMT (Xiamen) New Technical Materials' Balance Sheet?

The latest balance sheet data shows that HMT (Xiamen) New Technical Materials had liabilities of CN¥242.4m due within a year, and liabilities of CN¥888.1m falling due after that. Offsetting this, it had CN¥1.44b in cash and CN¥973.3m in receivables that were due within 12 months. So it can boast CN¥1.28b more liquid assets than total liabilities.

It's good to see that HMT (Xiamen) New Technical Materials has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, HMT (Xiamen) New Technical Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, HMT (Xiamen) New Technical Materials grew its EBIT by 97% over the last twelve months, and that growth will make it easier to handle its debt. 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 HMT (Xiamen) New Technical Materials'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While HMT (Xiamen) New Technical Materials 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. Over the last three years, HMT (Xiamen) New Technical Materials recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case HMT (Xiamen) New Technical Materials has CN¥642.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 97% over the last year. So we don't think HMT (Xiamen) New Technical Materials's use of debt is risky. 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. For example - HMT (Xiamen) New Technical Materials has 1 warning sign we think you should be aware of.

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.