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 note that HMT (Xiamen) New Technical Materials Co., Ltd (SHSE:603306) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is HMT (Xiamen) New Technical Materials's Debt?

As you can see below, at the end of June 2024, HMT (Xiamen) New Technical Materials had CN¥810.8m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥1.43b in cash, leading to a CN¥621.1m net cash position.

A Look At HMT (Xiamen) New Technical Materials' Liabilities

According to the last reported balance sheet, HMT (Xiamen) New Technical Materials had liabilities of CN¥344.3m due within 12 months, and liabilities of CN¥912.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.43b as well as receivables valued at CN¥966.0m due within 12 months. So it actually has CN¥1.14b more liquid assets than total liabilities.

It's good to see that HMT (Xiamen) New Technical Materials has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, HMT (Xiamen) New Technical Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, HMT (Xiamen) New Technical Materials grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. 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 HMT (Xiamen) New Technical Materials'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. HMT (Xiamen) New Technical Materials 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. Considering the last three years, HMT (Xiamen) New Technical Materials actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HMT (Xiamen) New Technical Materials has net cash of CN¥621.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 74% over the last year. So we don't think HMT (Xiamen) New Technical Materials's use of debt is risky. 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 2 warning signs for HMT (Xiamen) New Technical Materials that you should be aware of.

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.