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 Changchun High-Tech Industry (Group) Co., Ltd. (SZSE:000661) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Changchun High-Tech Industry (Group)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Changchun High-Tech Industry (Group) had CN¥941.5m of debt in March 2024, down from CN¥1.33b, one year before. However, it does have CN¥7.59b in cash offsetting this, leading to net cash of CN¥6.65b.

A Look At Changchun High-Tech Industry (Group)'s Liabilities

According to the last reported balance sheet, Changchun High-Tech Industry (Group) had liabilities of CN¥3.86b due within 12 months, and liabilities of CN¥963.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.59b as well as receivables valued at CN¥4.61b due within 12 months. So it actually has CN¥7.37b more liquid assets than total liabilities.

It's good to see that Changchun High-Tech Industry (Group) 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. Simply put, the fact that Changchun High-Tech Industry (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Changchun High-Tech Industry (Group) grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changchun High-Tech Industry (Group) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Changchun High-Tech Industry (Group) 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. Looking at the most recent three years, Changchun High-Tech Industry (Group) recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changchun High-Tech Industry (Group) has CN¥6.65b in net cash and a decent-looking balance sheet. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think Changchun High-Tech Industry (Group)'s use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Changchun High-Tech Industry (Group)'s dividend history, without delay!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com