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.' 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 note that Zhejiang HangKe Technology Incorporated Company (SHSE:688006) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Zhejiang HangKe Technology Carry?

As you can see below, at the end of March 2024, Zhejiang HangKe Technology had CN¥12.1m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥2.83b in cash, leading to a CN¥2.81b net cash position.

How Healthy Is Zhejiang HangKe Technology's Balance Sheet?

The latest balance sheet data shows that Zhejiang HangKe Technology had liabilities of CN¥4.79b due within a year, and liabilities of CN¥35.1m falling due after that. Offsetting this, it had CN¥2.83b in cash and CN¥2.59b in receivables that were due within 12 months. So it actually has CN¥597.5m more liquid assets than total liabilities.

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

On top of that, Zhejiang HangKe Technology grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang HangKe 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. Zhejiang HangKe 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. Considering the last three years, Zhejiang HangKe Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang HangKe Technology has CN¥2.81b in net cash and a decent-looking balance sheet. And we liked the look of last year's 60% year-on-year EBIT growth. So we don't think Zhejiang HangKe Technology'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. To that end, you should be aware of the 1 warning sign we've spotted with Zhejiang HangKe Technology .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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