Hengxin Technology (HKG:1085) Has A Rock Solid Balance Sheet

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. Importantly, Hengxin Technology Ltd. (HKG:1085) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hengxin Technology

What Is Hengxin Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hengxin Technology had CN¥228.6m of debt in December 2022, down from CN¥330.3m, one year before. However, its balance sheet shows it holds CN¥1.18b in cash, so it actually has CN¥952.9m net cash.

A Look At Hengxin Technology's Liabilities

We can see from the most recent balance sheet that Hengxin Technology had liabilities of CN¥632.5m falling due within a year, and liabilities of CN¥21.0m due beyond that. Offsetting this, it had CN¥1.18b in cash and CN¥687.6m in receivables that were due within 12 months. So it actually has CN¥1.22b more liquid assets than total liabilities.

This surplus strongly suggests that Hengxin Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hengxin Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Hengxin Technology has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hengxin Technology 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. Hengxin 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, Hengxin Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hengxin Technology has CN¥952.9m in net cash and a strong balance sheet. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in CN¥399m. At the end of the day we're not concerned about Hengxin Technology's debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 Hengxin Technology (of which 2 are potentially serious!) 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.

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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.