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 note that HMT (Xiamen) New Technical Materials Co., Ltd (SHSE:603306) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, at the end of September 2024, HMT (Xiamen) New Technical Materials had CN¥823.4m of debt, up from CN¥774.3m a year ago. Click the image for more detail. But it also has CN¥1.49b in cash to offset that, meaning it has CN¥664.9m net cash.

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

We can see from the most recent balance sheet that HMT (Xiamen) New Technical Materials had liabilities of CN¥419.7m falling due within a year, and liabilities of CN¥914.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.49b as well as receivables valued at CN¥828.9m due within 12 months. So it can boast CN¥982.5m more liquid assets than total liabilities.

This surplus suggests that HMT (Xiamen) New Technical Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 39% 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'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. 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 reported free cash flow worth 7.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HMT (Xiamen) New Technical Materials has net cash of CN¥664.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 39% year-on-year EBIT growth. So we don't think HMT (Xiamen) New Technical Materials's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for HMT (Xiamen) New Technical Materials 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.