These 4 Measures Indicate That Shenzhen Hui Chuang Da Technology (SZSE:300909) Is Using Debt Reasonably Well

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.' 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. We note that Shenzhen Hui Chuang Da Technology Co., Ltd. (SZSE:300909) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen Hui Chuang Da Technology

How Much Debt Does Shenzhen Hui Chuang Da Technology Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Hui Chuang Da Technology had debt of CN¥32.5m at the end of March 2024, a reduction from CN¥110.3m over a year. But on the other hand it also has CN¥616.5m in cash, leading to a CN¥584.0m net cash position.

How Strong Is Shenzhen Hui Chuang Da Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Hui Chuang Da Technology had liabilities of CN¥485.5m due within 12 months and liabilities of CN¥227.3m due beyond that. Offsetting this, it had CN¥616.5m in cash and CN¥474.6m in receivables that were due within 12 months. So it can boast CN¥378.3m more liquid assets than total liabilities.

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

Fortunately, Shenzhen Hui Chuang Da Technology grew its EBIT by 9.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Hui Chuang Da Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Hui Chuang Da 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. Over the last three years, Shenzhen Hui Chuang Da Technology recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Hui Chuang Da Technology has CN¥584.0m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.4% in the last twelve months. So we are not troubled with Shenzhen Hui Chuang Da Technology's debt use. 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. We've identified 3 warning signs with Shenzhen Hui Chuang Da Technology , and understanding them should be part of your investment process.

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.

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.