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 Hsino Tower Group Co., Ltd. (SHSE:601096) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hsino Tower Group's Debt?

The image below, which you can click on for greater detail, shows that Hsino Tower Group had debt of CN¥556.1m at the end of March 2024, a reduction from CN¥1.48b over a year. However, it does have CN¥1.30b in cash offsetting this, leading to net cash of CN¥746.0m.

How Strong Is Hsino Tower Group's Balance Sheet?

The latest balance sheet data shows that Hsino Tower Group had liabilities of CN¥4.80b due within a year, and liabilities of CN¥134.2m falling due after that. On the other hand, it had cash of CN¥1.30b and CN¥3.79b worth of receivables due within a year. So it can boast CN¥160.2m more liquid assets than total liabilities.

Having regard to Hsino Tower Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥13.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hsino Tower Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Hsino Tower Group if management cannot prevent a repeat of the 26% 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hsino Tower Group will need earnings to service that debt. 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. While Hsino Tower Group 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. Happily for any shareholders, Hsino Tower Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hsino Tower Group has net cash of CN¥746.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥742m, being 243% of its EBIT. So we are not troubled with Hsino Tower Group's debt use. 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 1 warning sign for Hsino Tower Group you should know about.

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.