Is Hundsun Technologies (SHSE:600570) A Risky Investment?

Warren Buffett famously said, '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. We can see that Hundsun Technologies Inc. (SHSE:600570) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Hundsun Technologies

What Is Hundsun Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hundsun Technologies had CN¥795.2m of debt, an increase on CN¥526.7m, over one year. However, it does have CN¥2.93b in cash offsetting this, leading to net cash of CN¥2.13b.

A Look At Hundsun Technologies' Liabilities

According to the last reported balance sheet, Hundsun Technologies had liabilities of CN¥4.84b due within 12 months, and liabilities of CN¥349.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.93b as well as receivables valued at CN¥1.37b due within 12 months. So it has liabilities totalling CN¥893.4m more than its cash and near-term receivables, combined.

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 it's very unlikely that the CN¥47.4b company is short on cash, but still worth keeping an eye on the 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.

On top of that, Hundsun Technologies grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its 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 Hundsun Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hundsun Technologies 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, Hundsun Technologies 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

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¥2.13b. And it impressed us with its EBIT growth of 49% over the last year. So is Hundsun Technologies's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Hundsun Technologies that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.