We Think HMT (Xiamen) New Technical Materials (SHSE:603306) Can Stay On Top Of Its 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 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does HMT (Xiamen) New Technical Materials Carry?

As you can see below, at the end of March 2024, HMT (Xiamen) New Technical Materials had CN¥798.4m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.44b in cash offsetting this, leading to net cash of CN¥642.5m.

A Look At HMT (Xiamen) New Technical Materials' Liabilities

We can see from the most recent balance sheet that HMT (Xiamen) New Technical Materials had liabilities of CN¥242.4m falling due within a year, and liabilities of CN¥888.1m due beyond that. On the other hand, it had cash of CN¥1.44b and CN¥973.3m worth of receivables due within a year. So it actually has 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that HMT (Xiamen) New Technical Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HMT (Xiamen) New Technical Materials 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. 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 usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥642.5m, as well as more liquid assets than liabilities. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with HMT (Xiamen) New Technical Materials .

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.