Shanghai Huace Navigation Technology (SZSE:300627) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shanghai Huace Navigation Technology Ltd (SZSE:300627) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Huace Navigation Technology

What Is Shanghai Huace Navigation Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Shanghai Huace Navigation Technology had CN¥253.7m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥1.04b in cash, leading to a CN¥781.7m net cash position.

How Strong Is Shanghai Huace Navigation Technology's Balance Sheet?

The latest balance sheet data shows that Shanghai Huace Navigation Technology had liabilities of CN¥1.05b due within a year, and liabilities of CN¥204.7m falling due after that. Offsetting these obligations, it had cash of CN¥1.04b as well as receivables valued at CN¥1.42b due within 12 months. So it can boast CN¥1.20b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Huace Navigation Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Huace Navigation Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shanghai Huace Navigation Technology grew its EBIT by 39% 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 Shanghai Huace Navigation 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Huace Navigation 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, Shanghai Huace Navigation Technology recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Huace Navigation Technology has CN¥781.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 39% year-on-year EBIT growth. So we don't think Shanghai Huace Navigation Technology's use of debt is risky. 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 Shanghai Huace Navigation Technology's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.