These 4 Measures Indicate That Guangdong Hotata Technology GroupLtd (SHSE:603848) Is Using Debt Reasonably Well

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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guangdong Hotata Technology GroupLtd

What Is Guangdong Hotata Technology GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangdong Hotata Technology GroupLtd had CN¥38.0m of debt in September 2023, down from CN¥75.0m, one year before. However, its balance sheet shows it holds CN¥240.8m in cash, so it actually has CN¥202.8m net cash.

How Healthy Is Guangdong Hotata Technology GroupLtd's Balance Sheet?

According to the last reported balance sheet, Guangdong Hotata Technology GroupLtd had liabilities of CN¥359.9m due within 12 months, and liabilities of CN¥23.6m due beyond 12 months. Offsetting this, it had CN¥240.8m in cash and CN¥84.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥58.6m more than its cash and near-term receivables, combined.

Having regard to Guangdong Hotata Technology GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.22b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Fortunately, Guangdong Hotata Technology GroupLtd grew its EBIT by 2.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Guangdong Hotata Technology GroupLtd 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Guangdong Hotata Technology GroupLtd has CN¥202.8m in net cash. And it also grew its EBIT by 2.8% over the last year. So we are not troubled with Guangdong Hotata Technology GroupLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangdong Hotata Technology GroupLtd you should know about.

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.