Is Hundsun Technologies (SHSE:600570) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Hundsun Technologies Inc. (SHSE:600570) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hundsun Technologies

What Is Hundsun Technologies's Debt?

The image below, which you can click on for greater detail, shows that Hundsun Technologies had debt of CN¥622.9m at the end of September 2024, a reduction from CN¥795.2m over a year. But it also has CN¥2.14b in cash to offset that, meaning it has CN¥1.51b net cash.

A Look At Hundsun Technologies' Liabilities

The latest balance sheet data shows that Hundsun Technologies had liabilities of CN¥4.12b due within a year, and liabilities of CN¥309.3m falling due after that. Offsetting this, it had CN¥2.14b in cash and CN¥1.41b in receivables that were due within 12 months. So its liabilities total CN¥886.1m more than the combination of its cash and short-term receivables.

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¥53.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Hundsun Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Hundsun Technologies's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hundsun Technologies 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 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 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hundsun Technologies has CN¥1.51b in net cash. So we are not troubled with Hundsun Technologies's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Hundsun Technologies, 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.