We Think Hwatsing Technology (SHSE:688120) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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.

See 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 Hwatsing Technology had CN¥583.4m of debt in June 2024, down from CN¥679.1m, one year before. However, it does have CN¥4.47b in cash offsetting this, leading to net cash of CN¥3.89b.

A Look At Hwatsing Technology's Liabilities

We can see from the most recent balance sheet that Hwatsing Technology had liabilities of CN¥3.41b falling due within a year, and liabilities of CN¥1.00b due beyond that. Offsetting this, it had CN¥4.47b in cash and CN¥755.0m in receivables that were due within 12 months. So it actually has CN¥813.8m more liquid assets than total liabilities.

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

Also good is that Hwatsing Technology grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent three years, Hwatsing Technology recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hwatsing Technology has CN¥3.89b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 11% over the last year. So we are not troubled with Hwatsing Technology'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. We've identified 2 warning signs with Hwatsing Technology (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.