Hundsun Technologies (SHSE:600570) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Hundsun Technologies Inc. (SHSE:600570) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hundsun Technologies

How Much Debt Does Hundsun Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hundsun Technologies had CN¥328.2m of debt, an increase on CN¥192.8m, over one year. But it also has CN¥2.68b in cash to offset that, meaning it has CN¥2.35b net cash.

A Look At Hundsun Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Hundsun Technologies had liabilities of CN¥4.08b due within 12 months and liabilities of CN¥313.4m due beyond that. Offsetting this, it had CN¥2.68b in cash and CN¥1.37b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥349.5m.

This state of affairs indicates that Hundsun Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥30.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Hundsun Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Hundsun Technologies has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. 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 Hundsun Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hundsun Technologies 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, Hundsun Technologies's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Hundsun Technologies's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.35b. And it impressed us with its EBIT growth of 25% over the last year. So we don't think Hundsun Technologies's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hundsun Technologies is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.