Hwatsing Technology (SHSE:688120) Could Easily Take On More Debt

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. Importantly, Hwatsing Technology Co., Ltd. (SHSE:688120) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hwatsing Technology

What Is Hwatsing Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hwatsing Technology had CN¥679.1m of debt, an increase on CN¥198.5m, over one year. However, it does have CN¥4.63b in cash offsetting this, leading to net cash of CN¥3.95b.

How Healthy Is Hwatsing Technology's Balance Sheet?

The latest balance sheet data shows that Hwatsing Technology had liabilities of CN¥2.42b due within a year, and liabilities of CN¥961.9m falling due after that. On the other hand, it had cash of CN¥4.63b and CN¥610.9m worth of receivables due within a year. So it actually has CN¥1.86b 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!

In addition to that, we're happy to report that Hwatsing Technology has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hwatsing Technology 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. Looking at the most recent three years, Hwatsing Technology recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hwatsing Technology has net cash of CN¥3.95b, as well as more liquid assets than liabilities. And we liked the look of last year's 91% year-on-year EBIT growth. So we don't think Hwatsing Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Hwatsing Technology, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.