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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Han's Laser Technology Industry Group Co., Ltd. (SZSE:002008) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Han's Laser Technology Industry Group Carry?
As you can see below, Han's Laser Technology Industry Group had CN¥5.61b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥8.66b in cash to offset that, meaning it has CN¥3.04b net cash.
How Healthy Is Han's Laser Technology Industry Group's Balance Sheet?
The latest balance sheet data shows that Han's Laser Technology Industry Group had liabilities of CN¥13.6b due within a year, and liabilities of CN¥3.11b falling due after that. Offsetting these obligations, it had cash of CN¥8.66b as well as receivables valued at CN¥9.42b due within 12 months. So it can boast CN¥1.40b more liquid assets than total liabilities.
This short term liquidity is a sign that Han's Laser Technology Industry Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Han's Laser Technology Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Han's Laser Technology Industry Group grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Han's Laser Technology Industry Group's ability to maintain a healthy balance sheet going forward. 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. Han's Laser Technology Industry Group 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. During the last three years, Han's Laser Technology Industry Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Han's Laser Technology Industry Group has CN¥3.04b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 28% over the last year. So we are not troubled with Han's Laser Technology Industry Group's debt use. 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. For instance, we've identified 2 warning signs for Han's Laser Technology Industry Group (1 is significant) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.