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.' 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 can see that Shaanxi Huaqin Technology Industry Co.,Ltd. (SHSE:688281) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Shaanxi Huaqin Technology IndustryLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shaanxi Huaqin Technology IndustryLtd had debt of CN¥555.0m, up from CN¥107.7m in one year. However, its balance sheet shows it holds CN¥2.93b in cash, so it actually has CN¥2.37b net cash.

A Look At Shaanxi Huaqin Technology IndustryLtd's Liabilities

The latest balance sheet data shows that Shaanxi Huaqin Technology IndustryLtd had liabilities of CN¥416.4m due within a year, and liabilities of CN¥693.5m falling due after that. Offsetting this, it had CN¥2.93b in cash and CN¥723.4m in receivables that were due within 12 months. So it actually has CN¥2.54b more liquid assets than total liabilities.

This short term liquidity is a sign that Shaanxi Huaqin Technology IndustryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shaanxi Huaqin Technology IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shaanxi Huaqin Technology IndustryLtd's load is not too heavy, because its EBIT was down 34% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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. 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. Over the last three years, Shaanxi Huaqin Technology IndustryLtd saw substantial negative free cash flow, in total. 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 Shaanxi Huaqin Technology IndustryLtd has CN¥2.37b in net cash and a decent-looking balance sheet. So while Shaanxi Huaqin Technology IndustryLtd does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shaanxi Huaqin Technology IndustryLtd (of which 1 is a bit concerning!) you should know about.

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.