Freetech Road Recycling Technology (Holdings) (HKG:6888) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Freetech Road Recycling Technology (Holdings) Limited (HKG:6888) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Freetech Road Recycling Technology (Holdings)

How Much Debt Does Freetech Road Recycling Technology (Holdings) Carry?

As you can see below, at the end of June 2024, Freetech Road Recycling Technology (Holdings) had HK$97.8m of debt, up from HK$93.7m a year ago. Click the image for more detail. However, it does have HK$245.5m in cash offsetting this, leading to net cash of HK$147.7m.

How Healthy Is Freetech Road Recycling Technology (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Freetech Road Recycling Technology (Holdings) had liabilities of HK$364.1m due within a year, and liabilities of HK$17.5m falling due after that. On the other hand, it had cash of HK$245.5m and HK$385.9m worth of receivables due within a year. So it actually has HK$249.9m more liquid assets than total liabilities.

This surplus strongly suggests that Freetech Road Recycling Technology (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Freetech Road Recycling Technology (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Freetech Road Recycling Technology (Holdings)'s EBIT launched higher than Elon Musk, gaining a whopping 366% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Freetech Road Recycling Technology (Holdings) 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 company can only pay off debt with cold hard cash, not accounting profits. While Freetech Road Recycling Technology (Holdings) 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 last three years, Freetech Road Recycling Technology (Holdings) saw substantial negative free cash flow, in total. 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 we empathize with investors who find debt concerning, the bottom line is that Freetech Road Recycling Technology (Holdings) has net cash of HK$147.7m and plenty of liquid assets. And we liked the look of last year's 366% year-on-year EBIT growth. So is Freetech Road Recycling Technology (Holdings)'s debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Freetech Road Recycling Technology (Holdings) .

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.