Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) Takes On Some Risk With Its Use Of Debt

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.' 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. We note that Shaanxi Huaqin Technology Industry Co.,Ltd. (SHSE:688281) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Shaanxi Huaqin Technology IndustryLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shaanxi Huaqin Technology IndustryLtd had CN¥555.0m of debt, an increase on CN¥107.7m, over one year. But it also has CN¥2.93b in cash to offset that, meaning it has CN¥2.37b net cash.

How Healthy 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¥416.4m falling due within a year, and liabilities of CN¥693.5m due beyond that. On the other hand, it had cash of CN¥2.93b and CN¥723.4m worth of receivables due within a year. So it can boast CN¥2.54b more liquid assets than total liabilities.

This short term liquidity is a sign that Shaanxi Huaqin Technology IndustryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shaanxi Huaqin Technology IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shaanxi Huaqin Technology IndustryLtd's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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¥2.37b in net cash and a decent-looking balance sheet. So while Shaanxi Huaqin Technology IndustryLtd does not have a great balance sheet, it's certainly not too bad. 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. For example Shaanxi Huaqin Technology IndustryLtd has 2 warning signs (and 1 which is significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.