HONG RI DA Technology (SZSE:301285) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, HONG RI DA Technology Company Limited (SZSE:301285) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HONG RI DA Technology

What Is HONG RI DA Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 HONG RI DA Technology had CN¥468.3m of debt, an increase on CN¥227.2m, over one year. However, it does have CN¥610.5m in cash offsetting this, leading to net cash of CN¥142.2m.

How Strong Is HONG RI DA Technology's Balance Sheet?

According to the last reported balance sheet, HONG RI DA Technology had liabilities of CN¥768.0m due within 12 months, and liabilities of CN¥63.2m due beyond 12 months. Offsetting this, it had CN¥610.5m in cash and CN¥304.7m in receivables that were due within 12 months. So it actually has CN¥84.0m more liquid assets than total liabilities.

This state of affairs indicates that HONG RI DA Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.63b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that HONG RI DA Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that HONG RI DA Technology grew its EBIT by 187% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HONG RI 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. HONG RI 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, HONG RI 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 it is always sensible to investigate a company's debt, in this case HONG RI DA Technology has CN¥142.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 187% year-on-year EBIT growth. So we are not troubled with HONG RI DA Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with HONG RI DA Technology (at least 2 which are potentially serious) , 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.

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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.