We Think Huaqin Technology (SHSE:603296) Can Stay On Top Of Its 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Huaqin Technology Co., Ltd. (SHSE:603296) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Huaqin Technology

What Is Huaqin Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Huaqin Technology had CN¥6.08b of debt in March 2024, down from CN¥15.2b, one year before. But on the other hand it also has CN¥15.5b in cash, leading to a CN¥9.42b net cash position.

How Healthy Is Huaqin Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Huaqin Technology had liabilities of CN¥28.7b due within 12 months and liabilities of CN¥1.80b due beyond that. On the other hand, it had cash of CN¥15.5b and CN¥14.3b worth of receivables due within a year. So it has liabilities totalling CN¥709.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that Huaqin Technology's 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¥52.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

On top of that, Huaqin Technology grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, Huaqin Technology recorded free cash flow of 36% 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 Huaqin Technology has CN¥9.42b in net cash. And it impressed us with its EBIT growth of 62% over the last year. So is Huaqin Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Huaqin Technology's earnings per share history for free.

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.