Hichain LogisticsLtd (SZSE:300873) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Hichain Logistics Co.,Ltd. (SZSE:300873) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hichain LogisticsLtd

What Is Hichain LogisticsLtd's Debt?

As you can see below, at the end of June 2024, Hichain LogisticsLtd had CN¥250.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥1.68b in cash, leading to a CN¥1.43b net cash position.

How Strong Is Hichain LogisticsLtd's Balance Sheet?

According to the last reported balance sheet, Hichain LogisticsLtd had liabilities of CN¥1.12b due within 12 months, and liabilities of CN¥140.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.68b as well as receivables valued at CN¥534.9m due within 12 months. So it can boast CN¥952.3m more liquid assets than total liabilities.

This surplus suggests that Hichain LogisticsLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Hichain LogisticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Hichain LogisticsLtd has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hichain LogisticsLtd's ability to maintain a healthy balance sheet going forward. 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 Hichain LogisticsLtd 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 most recent three years, Hichain LogisticsLtd recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hichain LogisticsLtd has net cash of CN¥1.43b, as well as more liquid assets than liabilities. So we are not troubled with Hichain LogisticsLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hichain LogisticsLtd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.