Does Huaqin Technology (SHSE:603296) Have A Healthy Balance Sheet?

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. We note that Huaqin Technology Co., Ltd. (SHSE:603296) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Huaqin Technology

How Much Debt Does Huaqin Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Huaqin Technology had CN¥7.25b of debt, an increase on CN¥6.32b, over one year. However, its balance sheet shows it holds CN¥13.6b in cash, so it actually has CN¥6.35b net cash.

How Healthy Is Huaqin Technology's Balance Sheet?

According to the last reported balance sheet, Huaqin Technology had liabilities of CN¥35.4b due within 12 months, and liabilities of CN¥2.55b due beyond 12 months. Offsetting these obligations, it had cash of CN¥13.6b as well as receivables valued at CN¥20.3b due within 12 months. So its liabilities total CN¥4.00b more than the combination of its cash and short-term receivables.

Given Huaqin Technology has a market capitalization of CN¥43.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Huaqin Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Huaqin Technology has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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 Huaqin Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Huaqin 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. In the last three years, Huaqin Technology's free cash flow amounted to 48% 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 Huaqin Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.35b. And we liked the look of last year's 26% year-on-year EBIT growth. So we don't think Huaqin Technology's use of debt is risky. 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 Huaqin Technology , and understanding them should be part of your investment process.

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.

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.