David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Hangzhou Zhongtai Cryogenic Technology Corporation (SZSE:300435) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Hangzhou Zhongtai Cryogenic Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hangzhou Zhongtai Cryogenic Technology had CN¥306.9m of debt in September 2024, down from CN¥1.08b, one year before. But on the other hand it also has CN¥1.11b in cash, leading to a CN¥805.1m net cash position.

How Strong Is Hangzhou Zhongtai Cryogenic Technology's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Zhongtai Cryogenic Technology had liabilities of CN¥1.42b falling due within a year, and liabilities of CN¥60.7m due beyond that. Offsetting this, it had CN¥1.11b in cash and CN¥769.8m in receivables that were due within 12 months. So it actually has CN¥402.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Zhongtai Cryogenic Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou Zhongtai Cryogenic Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Hangzhou Zhongtai Cryogenic Technology's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hangzhou Zhongtai Cryogenic Technology's ability to maintain a healthy balance sheet going forward. 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. Hangzhou Zhongtai Cryogenic 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. Looking at the most recent three years, Hangzhou Zhongtai Cryogenic Technology recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hangzhou Zhongtai Cryogenic Technology has net cash of CN¥805.1m, as well as more liquid assets than liabilities. So we are not troubled with Hangzhou Zhongtai Cryogenic Technology's debt use. 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 1 warning sign we've spotted with Hangzhou Zhongtai Cryogenic Technology .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.