Does Hwatsing Technology (SHSE:688120) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hwatsing Technology Co., Ltd. (SHSE:688120) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Hwatsing Technology

What Is Hwatsing Technology's Net Debt?

As you can see below, at the end of March 2024, Hwatsing Technology had CN¥608.4m of debt, up from CN¥221.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥4.59b in cash, leading to a CN¥3.98b net cash position.

How Strong Is Hwatsing Technology's Balance Sheet?

The latest balance sheet data shows that Hwatsing Technology had liabilities of CN¥2.90b due within a year, and liabilities of CN¥1.07b falling due after that. Offsetting this, it had CN¥4.59b in cash and CN¥701.4m in receivables that were due within 12 months. So it can boast CN¥1.31b more liquid assets than total liabilities.

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

Another good sign is that Hwatsing Technology has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hwatsing Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hwatsing Technology 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. In the last three years, Hwatsing Technology's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hwatsing Technology has CN¥3.98b in net cash and a decent-looking balance sheet. And we liked the look of last year's 30% year-on-year EBIT growth. So we don't think Hwatsing Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Hwatsing Technology that you should be aware of before investing here.

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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