Does Hubei Shuanghuan Science and Technology StockLtd (SZSE:000707) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Hubei Shuanghuan Science and Technology Stock Co.,Ltd (SZSE:000707) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hubei Shuanghuan Science and Technology StockLtd

What Is Hubei Shuanghuan Science and Technology StockLtd's Net Debt?

As you can see below, Hubei Shuanghuan Science and Technology StockLtd had CN¥586.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥1.00b in cash, so it actually has CN¥414.8m net cash.

How Healthy Is Hubei Shuanghuan Science and Technology StockLtd's Balance Sheet?

The latest balance sheet data shows that Hubei Shuanghuan Science and Technology StockLtd had liabilities of CN¥644.7m due within a year, and liabilities of CN¥349.2m falling due after that. Offsetting these obligations, it had cash of CN¥1.00b as well as receivables valued at CN¥371.9m due within 12 months. So it actually has CN¥378.9m more liquid assets than total liabilities.

This surplus suggests that Hubei Shuanghuan Science and Technology StockLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hubei Shuanghuan Science and Technology StockLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Hubei Shuanghuan Science and Technology StockLtd has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Hubei Shuanghuan Science and Technology StockLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hubei Shuanghuan Science and Technology StockLtd 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, Hubei Shuanghuan Science and Technology StockLtd produced sturdy free cash flow equating to 73% 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 Hubei Shuanghuan Science and Technology StockLtd has CN¥414.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥382m, being 73% of its EBIT. So we are not troubled with Hubei Shuanghuan Science and Technology StockLtd's debt use. 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 Hubei Shuanghuan Science and Technology StockLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.