Warren Buffett famously said, '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. As with many other companies Huagong Tech Company Limited (SZSE:000988) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Huagong Tech's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Huagong Tech had debt of CN¥3.44b, up from CN¥3.18b in one year. But on the other hand it also has CN¥3.71b in cash, leading to a CN¥267.3m net cash position.

A Look At Huagong Tech's Liabilities

The latest balance sheet data shows that Huagong Tech had liabilities of CN¥7.04b due within a year, and liabilities of CN¥2.64b falling due after that. Offsetting these obligations, it had cash of CN¥3.71b as well as receivables valued at CN¥6.35b due within 12 months. So it can boast CN¥376.9m more liquid assets than total liabilities.

Having regard to Huagong Tech's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥37.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Huagong Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Huagong Tech has increased its EBIT by 5.3% over twelve months, which should ease any concerns about debt repayment. 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 Huagong Tech 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Huagong Tech 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. In the last three years, Huagong Tech's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Huagong Tech has CN¥267.3m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 5.3% over the last year. So we don't have any problem with Huagong Tech's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Huagong Tech .

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.