These 4 Measures Indicate That Hangzhou Greatstar Industrial (SZSE:002444) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hangzhou Greatstar Industrial Co., Ltd (SZSE:002444) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Hangzhou Greatstar Industrial

How Much Debt Does Hangzhou Greatstar Industrial Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hangzhou Greatstar Industrial had CN¥2.85b of debt, an increase on CN¥2.25b, over one year. However, it does have CN¥5.89b in cash offsetting this, leading to net cash of CN¥3.04b.

How Healthy Is Hangzhou Greatstar Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hangzhou Greatstar Industrial had liabilities of CN¥4.94b due within 12 months and liabilities of CN¥433.7m due beyond that. Offsetting these obligations, it had cash of CN¥5.89b as well as receivables valued at CN¥2.91b due within 12 months. So it can boast CN¥3.43b more liquid assets than total liabilities.

This surplus suggests that Hangzhou Greatstar Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hangzhou Greatstar Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Hangzhou Greatstar Industrial has increased its EBIT by 5.9% over twelve months, which should ease any concerns about debt repayment. 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 Hangzhou Greatstar Industrial can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hangzhou Greatstar Industrial 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, Hangzhou Greatstar Industrial produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Greatstar Industrial has CN¥3.04b in net cash and a decent-looking balance sheet. So we don't think Hangzhou Greatstar Industrial's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Hangzhou Greatstar Industrial that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com