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 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 note that Huakai Yibai Technology Co.,Ltd. (SZSE:300592) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Huakai Yibai TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Huakai Yibai TechnologyLtd had CN¥220.7m of debt, an increase on CN¥71.5m, over one year. But it also has CN¥694.1m in cash to offset that, meaning it has CN¥473.4m net cash.

A Look At Huakai Yibai TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Huakai Yibai TechnologyLtd had liabilities of CN¥781.4m due within 12 months and liabilities of CN¥454.6m due beyond that. On the other hand, it had cash of CN¥694.1m and CN¥584.3m worth of receivables due within a year. So it actually has CN¥42.4m more liquid assets than total liabilities.

This state of affairs indicates that Huakai Yibai TechnologyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.04b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Huakai Yibai TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Huakai Yibai TechnologyLtd grew its EBIT by 15% last year, making its debt load easier to handle. 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 Huakai Yibai TechnologyLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Huakai Yibai TechnologyLtd 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. Happily for any shareholders, Huakai Yibai TechnologyLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Huakai Yibai TechnologyLtd has CN¥473.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥187m, being 125% of its EBIT. So we don't think Huakai Yibai TechnologyLtd's use of debt is risky. 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. For example - Huakai Yibai TechnologyLtd has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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