We Think HengTen Networks Group (HKG:136) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies HengTen Networks Group Limited (HKG:136) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HengTen Networks Group

What Is HengTen Networks Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 HengTen Networks Group had debt of CN¥150.0m, up from CN¥27.3m in one year. But it also has CN¥652.6m in cash to offset that, meaning it has CN¥502.6m net cash.

How Healthy Is HengTen Networks Group's Balance Sheet?

According to the last reported balance sheet, HengTen Networks Group had liabilities of CN¥2.33b due within 12 months, and liabilities of CN¥3.98b due beyond 12 months. Offsetting these obligations, it had cash of CN¥652.6m as well as receivables valued at CN¥454.2m due within 12 months. So its liabilities total CN¥5.21b more than the combination of its cash and short-term receivables.

HengTen Networks Group has a market capitalization of CN¥21.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, HengTen Networks Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that HengTen Networks Group grew its EBIT by 611% 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 HengTen Networks Group will need earnings to service that debt. 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. HengTen Networks Group 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. During the last three years, HengTen Networks Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While HengTen Networks Group does have more liabilities than liquid assets, it also has net cash of CN¥502.6m. And it impressed us with its EBIT growth of 611% over the last year. So we are not troubled with HengTen Networks Group'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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for HengTen Networks Group (of which 1 is significant!) you should know about.

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.

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.