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 note that Hunan Boyun New Materials Co.,Ltd (SZSE:002297) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Hunan Boyun New MaterialsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Hunan Boyun New MaterialsLtd had CN¥205.0m of debt in June 2024, down from CN¥246.6m, one year before. But on the other hand it also has CN¥471.3m in cash, leading to a CN¥266.3m net cash position.

How Healthy Is Hunan Boyun New MaterialsLtd's Balance Sheet?

According to the last reported balance sheet, Hunan Boyun New MaterialsLtd had liabilities of CN¥552.9m due within 12 months, and liabilities of CN¥132.4m due beyond 12 months. Offsetting this, it had CN¥471.3m in cash and CN¥368.3m in receivables that were due within 12 months. So it can boast CN¥154.3m more liquid assets than total liabilities.

This surplus suggests that Hunan Boyun New MaterialsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hunan Boyun New MaterialsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Hunan Boyun New MaterialsLtd grew its EBIT by 373% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Hunan Boyun New MaterialsLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hunan Boyun New MaterialsLtd 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. Over the last three years, Hunan Boyun New MaterialsLtd 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

While it is always sensible to investigate a company's debt, in this case Hunan Boyun New MaterialsLtd has CN¥266.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 373% year-on-year EBIT growth. So we don't have any problem with Hunan Boyun New MaterialsLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Hunan Boyun New MaterialsLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.