Hwatsing Technology (SHSE:688120) Seems To Use Debt Rather Sparingly

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.' 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 Hwatsing Technology Co., Ltd. (SHSE:688120) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hwatsing Technology had CN¥508.7m of debt in September 2024, down from CN¥683.1m, one year before. However, its balance sheet shows it holds CN¥4.78b in cash, so it actually has CN¥4.27b net cash.

How Healthy Is Hwatsing Technology's Balance Sheet?

According to the last reported balance sheet, Hwatsing Technology had liabilities of CN¥3.65b due within 12 months, and liabilities of CN¥1.12b due beyond 12 months. On the other hand, it had cash of CN¥4.78b and CN¥732.1m worth of receivables due within a year. So it actually has CN¥735.4m more liquid assets than total liabilities.

This state of affairs indicates that Hwatsing Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥39.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Hwatsing Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Hwatsing Technology has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hwatsing Technology'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. 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. In the last three years, Hwatsing Technology's free cash flow amounted to 42% of its EBIT, less 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¥4.27b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 74% over the last year. So is Hwatsing Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hwatsing Technology's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.