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. Importantly, XiaMen HongXin Electron-tech Group Co.,Ltd (SZSE:300657) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for XiaMen HongXin Electron-tech GroupLtd

How Much Debt Does XiaMen HongXin Electron-tech GroupLtd Carry?

The chart below, which you can click on for greater detail, shows that XiaMen HongXin Electron-tech GroupLtd had CN¥1.06b in debt in September 2023; about the same as the year before. On the flip side, it has CN¥789.2m in cash leading to net debt of about CN¥270.5m.

How Healthy Is XiaMen HongXin Electron-tech GroupLtd's Balance Sheet?

The latest balance sheet data shows that XiaMen HongXin Electron-tech GroupLtd had liabilities of CN¥2.80b due within a year, and liabilities of CN¥679.1m falling due after that. Offsetting these obligations, it had cash of CN¥789.2m as well as receivables valued at CN¥1.58b due within 12 months. So it has liabilities totalling CN¥1.11b more than its cash and near-term receivables, combined.

Since publicly traded XiaMen HongXin Electron-tech GroupLtd shares are worth a total of CN¥10.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is XiaMen HongXin Electron-tech GroupLtd'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.

In the last year XiaMen HongXin Electron-tech GroupLtd's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months XiaMen HongXin Electron-tech GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥424m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥190m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 example, we've discovered 2 warning signs for XiaMen HongXin Electron-tech GroupLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.