Hichain LogisticsLtd (SZSE:300873) Seems To Use Debt Rather Sparingly

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.' 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 Hichain Logistics Co.,Ltd. (SZSE:300873) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hichain LogisticsLtd

What Is Hichain LogisticsLtd's Net Debt?

As you can see below, at the end of September 2024, Hichain LogisticsLtd had CN¥400.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥1.23b.

How Strong Is Hichain LogisticsLtd's Balance Sheet?

The latest balance sheet data shows that Hichain LogisticsLtd had liabilities of CN¥1.10b due within a year, and liabilities of CN¥120.2m falling due after that. On the other hand, it had cash of CN¥1.63b and CN¥674.5m worth of receivables due within a year. So it actually has CN¥1.08b more liquid assets than total liabilities.

It's good to see that Hichain LogisticsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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!

Another good sign is that Hichain LogisticsLtd has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hichain LogisticsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hichain LogisticsLtd 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. In the last three years, Hichain LogisticsLtd's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hichain LogisticsLtd has net cash of CN¥1.23b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 30% over the last year. So is Hichain LogisticsLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hichain LogisticsLtd , and understanding them should be part of your investment process.

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.