Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Zhejiang Hechuan Technology Co., Ltd. (SHSE:688320) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Zhejiang Hechuan Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Hechuan Technology had debt of CN¥206.1m, up from CN¥148.2m in one year. On the flip side, it has CN¥124.4m in cash leading to net debt of about CN¥81.7m.

How Healthy Is Zhejiang Hechuan Technology's Balance Sheet?

According to the last reported balance sheet, Zhejiang Hechuan Technology had liabilities of CN¥483.7m due within 12 months, and liabilities of CN¥51.3m due beyond 12 months. On the other hand, it had cash of CN¥124.4m and CN¥672.1m worth of receivables due within a year. So it actually has CN¥261.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Hechuan Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Hechuan Technology'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.

In the last year Zhejiang Hechuan Technology's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Zhejiang Hechuan Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥8.9m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. Be aware that Zhejiang Hechuan Technology is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.