Here's Why Shenzhen Hui Chuang Da Technology (SZSE:300909) Can Manage Its Debt Responsibly

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 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. We can see that Shenzhen Hui Chuang Da Technology Co., Ltd. (SZSE:300909) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen Hui Chuang Da Technology

How Much Debt Does Shenzhen Hui Chuang Da Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen Hui Chuang Da Technology had CN¥147.4m of debt, an increase on CN¥90.0m, over one year. But it also has CN¥450.1m in cash to offset that, meaning it has CN¥302.7m net cash.

A Look At Shenzhen Hui Chuang Da Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Hui Chuang Da Technology had liabilities of CN¥599.5m due within 12 months and liabilities of CN¥187.3m due beyond that. On the other hand, it had cash of CN¥450.1m and CN¥501.5m worth of receivables due within a year. So it actually has CN¥164.7m more liquid assets than total liabilities.

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

Also positive, Shenzhen Hui Chuang Da Technology grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Hui Chuang Da Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shenzhen Hui Chuang Da Technology 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 Hui Chuang Da Technology 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 we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Hui Chuang Da Technology has net cash of CN¥302.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't have any problem with Shenzhen Hui Chuang Da Technology's use of debt. 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 Shenzhen Hui Chuang Da 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.