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. We can see that Shenzhen Hello Tech Energy Co., Ltd. (SZSE:301327) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Shenzhen Hello Tech Energy's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Hello Tech Energy had CN¥252.9m of debt, an increase on CN¥222.6m, over one year. But on the other hand it also has CN¥5.00b in cash, leading to a CN¥4.75b net cash position.
How Strong Is Shenzhen Hello Tech Energy's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen Hello Tech Energy had liabilities of CN¥640.5m due within 12 months and liabilities of CN¥49.9m due beyond that. Offsetting these obligations, it had cash of CN¥5.00b as well as receivables valued at CN¥123.1m due within 12 months. So it actually has CN¥4.44b more liquid assets than total liabilities.
This luscious liquidity implies that Shenzhen Hello Tech Energy's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Shenzhen Hello Tech Energy has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Hello Tech Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Shenzhen Hello Tech Energy made a loss at the EBIT level, and saw its revenue drop to CN¥2.4b, which is a fall of 19%. That's not what we would hope to see.
So How Risky Is Shenzhen Hello Tech Energy?
While Shenzhen Hello Tech Energy lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥28m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. We've identified 1 warning sign with Shenzhen Hello Tech Energy , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.