The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hundsun Technologies Inc. (SHSE:600570) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 Hundsun Technologies's Debt?

As you can see below, Hundsun Technologies had CN¥622.9m of debt at September 2024, down from CN¥795.2m a year prior. But on the other hand it also has CN¥2.14b in cash, leading to a CN¥1.51b net cash position.

How Healthy Is Hundsun Technologies' Balance Sheet?

We can see from the most recent balance sheet that Hundsun Technologies had liabilities of CN¥4.12b falling due within a year, and liabilities of CN¥309.3m due beyond that. On the other hand, it had cash of CN¥2.14b and CN¥1.41b worth of receivables due within a year. So its liabilities total CN¥886.1m more than the combination of its cash and short-term receivables.

Having regard to Hundsun Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥56.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hundsun Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

While Hundsun Technologies doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hundsun Technologies'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hundsun Technologies 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. In the last three years, Hundsun Technologies's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hundsun Technologies has CN¥1.51b in net cash. So we are not troubled with Hundsun Technologies's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hundsun Technologies's earnings per share history for free.

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.