Shenzhen H&T Intelligent ControlLtd (SZSE:002402) Has A Somewhat Strained Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shenzhen H&T Intelligent Control Co.Ltd (SZSE:002402) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out 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 September 2023, Shenzhen H&T Intelligent ControlLtd had CN¥807.3m of debt, up from CN¥749.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.06b in cash, leading to a CN¥257.2m net cash position.

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

The latest balance sheet data shows that Shenzhen H&T Intelligent ControlLtd had liabilities of CN¥3.91b due within a year, and liabilities of CN¥137.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.06b as well as receivables valued at CN¥2.58b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥400.0m.

Since publicly traded Shenzhen H&T Intelligent ControlLtd shares are worth a total of CN¥11.9b, 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. Despite its noteworthy liabilities, Shenzhen H&T Intelligent ControlLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Shenzhen H&T Intelligent ControlLtd has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shenzhen H&T Intelligent ControlLtd has CN¥257.2m in net cash. So while Shenzhen H&T Intelligent ControlLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Shenzhen H&T Intelligent ControlLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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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.