We Think Hubei Feilihua Quartz Glass (SZSE:300395) Can Stay On Top Of Its Debt

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. Importantly, Hubei Feilihua Quartz Glass Co., Ltd. (SZSE:300395) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hubei Feilihua Quartz Glass

How Much Debt Does Hubei Feilihua Quartz Glass Carry?

As you can see below, at the end of March 2024, Hubei Feilihua Quartz Glass had CN¥412.7m of debt, up from CN¥96.3m a year ago. Click the image for more detail. But it also has CN¥970.9m in cash to offset that, meaning it has CN¥558.2m net cash.

A Look At Hubei Feilihua Quartz Glass' Liabilities

Zooming in on the latest balance sheet data, we can see that Hubei Feilihua Quartz Glass had liabilities of CN¥1.10b due within 12 months and liabilities of CN¥396.1m due beyond that. Offsetting these obligations, it had cash of CN¥970.9m as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥553.2m more liquid assets than total liabilities.

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

On the other hand, Hubei Feilihua Quartz Glass saw its EBIT drop by 9.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Hubei Feilihua Quartz Glass 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hubei Feilihua Quartz Glass 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 Feilihua Quartz Glass burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hubei Feilihua Quartz Glass has net cash of CN¥558.2m, as well as more liquid assets than liabilities. So we are not troubled with Hubei Feilihua Quartz Glass's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hubei Feilihua Quartz Glass is showing 1 warning sign in our investment analysis , you should know about...

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.

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