We Think Freetech Road Recycling Technology (Holdings) (HKG:6888) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Freetech Road Recycling Technology (Holdings) Limited (HKG:6888) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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

As you can see below, at the end of June 2022, Freetech Road Recycling Technology (Holdings) had HK$102.7m of debt, up from HK$89.9m a year ago. Click the image for more detail. But on the other hand it also has HK$278.1m in cash, leading to a HK$175.5m net cash position.

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

We can see from the most recent balance sheet that Freetech Road Recycling Technology (Holdings) had liabilities of HK$466.7m falling due within a year, and liabilities of HK$27.4m due beyond that. Offsetting these obligations, it had cash of HK$278.1m as well as receivables valued at HK$455.5m due within 12 months. So it actually has HK$239.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Freetech Road Recycling Technology (Holdings)'s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Freetech Road Recycling Technology (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Freetech Road Recycling Technology (Holdings)'s load is not too heavy, because its EBIT was down 54% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Freetech Road Recycling Technology (Holdings) 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. Happily for any shareholders, Freetech Road Recycling Technology (Holdings) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$175.5m and plenty of liquid assets. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in HK$2.6m. So we don't think Freetech Road Recycling Technology (Holdings)'s use of debt is risky. 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. For example - Freetech Road Recycling Technology (Holdings) has 3 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.