Here's Why Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) Can Manage Its Debt Responsibly

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 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. Importantly, Shaanxi Huaqin Technology Industry Co.,Ltd. (SHSE:688281) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shaanxi Huaqin Technology IndustryLtd

How Much Debt Does Shaanxi Huaqin Technology IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shaanxi Huaqin Technology IndustryLtd had debt of CN¥357.2m, up from none in one year. But on the other hand it also has CN¥2.72b in cash, leading to a CN¥2.36b net cash position.

A Look At Shaanxi Huaqin Technology IndustryLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Shaanxi Huaqin Technology IndustryLtd had liabilities of CN¥421.8m due within 12 months and liabilities of CN¥481.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.72b as well as receivables valued at CN¥955.3m due within 12 months. So it actually has CN¥2.77b more liquid assets than total liabilities.

This surplus suggests that Shaanxi Huaqin Technology IndustryLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shaanxi Huaqin Technology IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shaanxi Huaqin Technology IndustryLtd's load is not too heavy, because its EBIT was down 33% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shaanxi Huaqin Technology IndustryLtd's ability to maintain a healthy balance sheet going forward. 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. Shaanxi Huaqin Technology IndustryLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Shaanxi Huaqin Technology IndustryLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shaanxi Huaqin Technology IndustryLtd has net cash of CN¥2.36b, as well as more liquid assets than liabilities. So we are not troubled with Shaanxi Huaqin Technology IndustryLtd'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. For instance, we've identified 1 warning sign for Shaanxi Huaqin Technology IndustryLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.