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. Importantly, Shaanxi Huaqin Technology Industry Co.,Ltd. (SHSE:688281) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shaanxi Huaqin Technology IndustryLtd's Net Debt?

As you can see below, at the end of March 2024, Shaanxi Huaqin Technology IndustryLtd had CN¥357.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.72b in cash, so it actually has CN¥2.36b net cash.

A Look At Shaanxi Huaqin Technology IndustryLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Shaanxi Huaqin Technology IndustryLtd had liabilities of CN¥421.8m due within 12 months and liabilities of CN¥481.8m due beyond that. On the other hand, it had cash of CN¥2.72b and CN¥955.3m worth of receivables due within a year. So it can boast CN¥2.77b more liquid assets than total liabilities.

It's good to see that Shaanxi Huaqin Technology IndustryLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shaanxi Huaqin Technology IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shaanxi Huaqin Technology IndustryLtd's load is not too heavy, because its EBIT was down 33% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shaanxi Huaqin Technology IndustryLtd 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 company can only pay off debt with cold hard cash, not accounting profits. While Shaanxi Huaqin Technology IndustryLtd 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, Shaanxi Huaqin Technology IndustryLtd burned a lot of cash. 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

While it is always sensible to investigate a company's debt, in this case Shaanxi Huaqin Technology IndustryLtd has CN¥2.36b in net cash and a decent-looking balance sheet. So we don't have any problem with Shaanxi Huaqin Technology IndustryLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Shaanxi Huaqin Technology IndustryLtd you should be aware of.

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.

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