Here's Why Guangdong Hotata Technology GroupLtd (SHSE:603848) Can Manage Its Debt Responsibly

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.' 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 Guangdong Hotata Technology Group Co.,Ltd. (SHSE:603848) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 Guangdong Hotata Technology GroupLtd

What Is Guangdong Hotata Technology GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Guangdong Hotata Technology GroupLtd had debt of CN¥40.5m, up from CN¥38.0m in one year. But on the other hand it also has CN¥191.2m in cash, leading to a CN¥150.7m net cash position.

A Look At Guangdong Hotata Technology GroupLtd's Liabilities

According to the last reported balance sheet, Guangdong Hotata Technology GroupLtd had liabilities of CN¥362.7m due within 12 months, and liabilities of CN¥61.7m due beyond 12 months. Offsetting this, it had CN¥191.2m in cash and CN¥82.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥151.1m more than its cash and near-term receivables, combined.

Since publicly traded Guangdong Hotata Technology GroupLtd shares are worth a total of CN¥6.65b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Guangdong Hotata Technology GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Guangdong Hotata Technology GroupLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guangdong Hotata Technology GroupLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guangdong Hotata Technology GroupLtd 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, Guangdong Hotata Technology GroupLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Guangdong Hotata Technology GroupLtd has CN¥150.7m in net cash. So we don't have any problem with Guangdong Hotata Technology GroupLtd's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Guangdong Hotata Technology GroupLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.