Warren Buffett famously said, '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. As with many other companies Guangdong Hotata Technology Group Co.,Ltd. (SHSE:603848) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guangdong Hotata Technology GroupLtd

How Much Debt Does Guangdong Hotata Technology GroupLtd Carry?

As you can see below, at the end of March 2023, Guangdong Hotata Technology GroupLtd had CN¥33.7m of debt, up from CN¥18.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥112.4m in cash, so it actually has CN¥78.7m net cash.

A Look At Guangdong Hotata Technology GroupLtd's Liabilities

We can see from the most recent balance sheet that Guangdong Hotata Technology GroupLtd had liabilities of CN¥317.3m falling due within a year, and liabilities of CN¥23.4m due beyond that. Offsetting these obligations, it had cash of CN¥112.4m as well as receivables valued at CN¥105.6m due within 12 months. So it has liabilities totalling CN¥122.7m more than its cash and near-term receivables, combined.

Having regard to Guangdong Hotata Technology GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.34b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Guangdong Hotata Technology GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Guangdong Hotata Technology GroupLtd if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Guangdong Hotata Technology GroupLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guangdong Hotata Technology GroupLtd 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, Guangdong Hotata Technology GroupLtd burned a lot of cash. 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 look at a company's total liabilities, it is very reassuring that Guangdong Hotata Technology GroupLtd has CN¥78.7m in net cash. So while Guangdong Hotata Technology GroupLtd does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Guangdong Hotata Technology GroupLtd (of which 1 makes us a bit uncomfortable!) you should know about.

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.

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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.