Is Huaqin Technology (SHSE:603296) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Huaqin Technology

How Much Debt Does Huaqin Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Huaqin Technology had debt of CN¥11.0b, up from CN¥6.49b in one year. However, its balance sheet shows it holds CN¥15.1b in cash, so it actually has CN¥4.04b net cash.

How Strong Is Huaqin Technology's Balance Sheet?

We can see from the most recent balance sheet that Huaqin Technology had liabilities of CN¥50.4b falling due within a year, and liabilities of CN¥2.78b due beyond that. On the other hand, it had cash of CN¥15.1b and CN¥28.7b worth of receivables due within a year. So it has liabilities totalling CN¥9.41b more than its cash and near-term receivables, combined.

Since publicly traded Huaqin Technology shares are worth a very impressive total of CN¥80.7b, it seems unlikely that this level of liabilities would be a major 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.

But the bad news is that Huaqin Technology has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Huaqin Technology 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Huaqin Technology 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, Huaqin Technology's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Huaqin Technology does have more liabilities than liquid assets, it also has net cash of CN¥4.04b. So we are not troubled with Huaqin Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Huaqin Technology, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.