David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Hunan Aerospace Huanyu Communication Technology Co.,LTD. (SHSE:688523) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Hunan Aerospace Huanyu Communication TechnologyLTD Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hunan Aerospace Huanyu Communication TechnologyLTD had CN¥270.5m of debt, an increase on CN¥254.6m, over one year. But on the other hand it also has CN¥571.7m in cash, leading to a CN¥301.2m net cash position.

How Healthy Is Hunan Aerospace Huanyu Communication TechnologyLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hunan Aerospace Huanyu Communication TechnologyLTD had liabilities of CN¥294.8m due within 12 months and liabilities of CN¥279.5m due beyond that. On the other hand, it had cash of CN¥571.7m and CN¥449.5m worth of receivables due within a year. So it can boast CN¥446.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Hunan Aerospace Huanyu Communication TechnologyLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hunan Aerospace Huanyu Communication TechnologyLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Hunan Aerospace Huanyu Communication TechnologyLTD's load is not too heavy, because its EBIT was down 25% 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 it is future earnings, more than anything, that will determine Hunan Aerospace Huanyu Communication TechnologyLTD's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hunan Aerospace Huanyu Communication TechnologyLTD 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. During the last three years, Hunan Aerospace Huanyu Communication TechnologyLTD burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hunan Aerospace Huanyu Communication TechnologyLTD has net cash of CN¥301.2m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Hunan Aerospace Huanyu Communication TechnologyLTD's balance sheet. 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. For instance, we've identified 3 warning signs for Hunan Aerospace Huanyu Communication TechnologyLTD (1 shouldn't be ignored) you should be aware of.

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.