Is Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Shaanxi Huaqin Technology Industry Co.,Ltd. (SHSE:688281) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shaanxi Huaqin Technology IndustryLtd

What Is Shaanxi Huaqin Technology IndustryLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Shaanxi Huaqin Technology IndustryLtd had CN¥316.8m of debt, an increase on none, over one year. But it also has CN¥2.90b in cash to offset that, meaning it has CN¥2.59b net cash.

How Strong Is Shaanxi Huaqin Technology IndustryLtd's Balance Sheet?

We can see from the most recent balance sheet that Shaanxi Huaqin Technology IndustryLtd had liabilities of CN¥613.3m falling due within a year, and liabilities of CN¥239.3m due beyond that. On the other hand, it had cash of CN¥2.90b and CN¥960.3m worth of receivables due within a year. So it can boast CN¥3.01b more liquid assets than total liabilities.

It's good to see that Shaanxi Huaqin Technology IndustryLtd 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. Succinctly put, Shaanxi Huaqin Technology IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shaanxi Huaqin Technology IndustryLtd if management cannot prevent a repeat of the 26% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shaanxi Huaqin Technology IndustryLtd 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, Shaanxi Huaqin Technology IndustryLtd saw substantial negative free cash flow, in total. 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 it is always sensible to investigate a company's debt, in this case Shaanxi Huaqin Technology IndustryLtd has CN¥2.59b in net cash and a decent-looking balance sheet. So we don't have any problem with Shaanxi Huaqin Technology IndustryLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shaanxi Huaqin Technology IndustryLtd you should be aware of.

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.