Here's Why Shenzhen H&T Intelligent ControlLtd (SZSE:002402) Has A Meaningful Debt Burden

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, Shenzhen H&T Intelligent Control Co.Ltd (SZSE:002402) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 Shenzhen H&T Intelligent ControlLtd

How Much Debt Does Shenzhen H&T Intelligent ControlLtd Carry?

As you can see below, at the end of March 2024, Shenzhen H&T Intelligent ControlLtd had CN¥863.3m of debt, up from CN¥655.0m a year ago. Click the image for more detail. However, it does have CN¥1.04b in cash offsetting this, leading to net cash of CN¥179.9m.

A Look At Shenzhen H&T Intelligent ControlLtd's Liabilities

We can see from the most recent balance sheet that Shenzhen H&T Intelligent ControlLtd had liabilities of CN¥4.74b falling due within a year, and liabilities of CN¥201.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.04b as well as receivables valued at CN¥2.82b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.08b.

Since publicly traded Shenzhen H&T Intelligent ControlLtd shares are worth a total of CN¥8.47b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shenzhen H&T Intelligent ControlLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Shenzhen H&T Intelligent ControlLtd's saving grace is its low debt levels, because its EBIT has tanked 29% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen H&T Intelligent ControlLtd'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen H&T Intelligent ControlLtd 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. Over the last three years, Shenzhen H&T Intelligent ControlLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Shenzhen H&T Intelligent ControlLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥179.9m. So while Shenzhen H&T Intelligent ControlLtd does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Shenzhen H&T Intelligent ControlLtd .

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.