Warren Buffett famously said, '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. Importantly, Hsino Tower Group Co., Ltd. (SHSE:601096) does carry debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Hsino Tower Group Carry?

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.

A Look At Hsino Tower Group's Liabilities

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.

This state of affairs indicates that Hsino Tower Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥10.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Hsino Tower Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Hsino Tower Group's load is not too heavy, because its EBIT was down 26% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hsino Tower Group 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. 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 it is always sensible to investigate a company's debt, in this case Hsino Tower Group has CN¥746.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 243% of that EBIT to free cash flow, bringing in CN¥742m. So we don't have any problem with Hsino Tower Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Hsino Tower Group you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.