Is Zhejiang Hechuan Technology (SHSE:688320) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zhejiang Hechuan Technology Co., Ltd. (SHSE:688320) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Hechuan Technology

How Much Debt Does Zhejiang Hechuan Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Hechuan Technology had CN¥206.1m of debt, an increase on CN¥148.2m, over one year. However, it also had CN¥124.4m in cash, and so its net debt is CN¥81.7m.

How Healthy Is Zhejiang Hechuan Technology's Balance Sheet?

The latest balance sheet data shows that Zhejiang Hechuan Technology had liabilities of CN¥483.7m due within a year, and liabilities of CN¥51.3m falling due after that. Offsetting this, it had CN¥124.4m in cash and CN¥672.1m in receivables that were due within 12 months. So it can boast CN¥261.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Hechuan Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Hechuan Technology 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.

In the last year Zhejiang Hechuan Technology's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Zhejiang Hechuan Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥8.9m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Zhejiang Hechuan Technology that you should be aware of.

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.