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.' 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. We can see that Shenzhen H&T Intelligent Control Co.Ltd (SZSE:002402) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shenzhen H&T Intelligent ControlLtd's Debt?

As you can see below, at the end of March 2024, Shenzhen H&T Intelligent ControlLtd had CN¥863.3m of debt, up from CN¥655.0m a year ago. Click the image for more detail. But it also has CN¥1.04b in cash to offset that, meaning it has CN¥179.9m net cash.

How Strong Is Shenzhen H&T Intelligent ControlLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen H&T Intelligent ControlLtd had liabilities of CN¥4.74b due within 12 months and liabilities of CN¥201.1m due beyond that. Offsetting this, it had CN¥1.04b in cash and CN¥2.82b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.08b more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen H&T Intelligent ControlLtd shares are worth a total of CN¥9.51b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shenzhen H&T Intelligent ControlLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Shenzhen H&T Intelligent ControlLtd if management cannot prevent a repeat of the 29% cut to EBIT 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 ultimately the future profitability of the business will decide if Shenzhen H&T Intelligent ControlLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen H&T Intelligent ControlLtd 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. Over the last three years, Shenzhen H&T Intelligent ControlLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Shenzhen H&T Intelligent ControlLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥179.9m. So although we see some areas for improvement, we're not too worried about Shenzhen H&T Intelligent ControlLtd's balance sheet. 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 2 warning signs we've spotted with Shenzhen H&T Intelligent ControlLtd .

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