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.' 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 Hygon Information Technology Co., Ltd. (SHSE:688041) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Hygon Information Technology's Net Debt?

As you can see below, at the end of March 2024, Hygon Information Technology had CN¥1.37b of debt, up from CN¥1.07b a year ago. Click the image for more detail. But it also has CN¥10.1b in cash to offset that, meaning it has CN¥8.78b net cash.

How Strong Is Hygon Information Technology's Balance Sheet?

The latest balance sheet data shows that Hygon Information Technology had liabilities of CN¥1.24b due within a year, and liabilities of CN¥1.31b falling due after that. On the other hand, it had cash of CN¥10.1b and CN¥1.30b worth of receivables due within a year. So it actually has CN¥8.90b more liquid assets than total liabilities.

This surplus suggests that Hygon Information Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hygon Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Hygon Information Technology grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hygon Information Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hygon Information Technology 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. During the last three years, Hygon Information Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hygon Information Technology has net cash of CN¥8.78b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with Hygon Information Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Hygon Information Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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