Shanghai Huace Navigation Technology (SZSE:300627) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Shanghai Huace Navigation Technology Ltd (SZSE:300627) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanghai Huace Navigation Technology

What Is Shanghai Huace Navigation Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Huace Navigation Technology had debt of CN¥210.3m at the end of March 2024, a reduction from CN¥324.4m over a year. But on the other hand it also has CN¥1.26b in cash, leading to a CN¥1.05b net cash position.

A Look At Shanghai Huace Navigation Technology's Liabilities

The latest balance sheet data shows that Shanghai Huace Navigation Technology had liabilities of CN¥920.4m due within a year, and liabilities of CN¥190.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.26b as well as receivables valued at CN¥1.09b due within 12 months. So it actually has CN¥1.24b more liquid assets than total liabilities.

This surplus suggests that Shanghai Huace Navigation Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Huace Navigation Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shanghai Huace Navigation Technology has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Huace Navigation Technology'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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Shanghai Huace Navigation Technology's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Huace Navigation Technology has net cash of CN¥1.05b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Shanghai Huace Navigation Technology's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shanghai Huace Navigation Technology you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com