Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Heilongjiang Transport Development Co., Ltd. (SHSE:601188) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

How Much Debt Does Heilongjiang Transport Development Carry?

As you can see below, at the end of June 2024, Heilongjiang Transport Development had CN¥200.6m of debt, up from CN¥157.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.39b in cash, so it actually has CN¥1.19b net cash.

A Look At Heilongjiang Transport Development's Liabilities

Zooming in on the latest balance sheet data, we can see that Heilongjiang Transport Development had liabilities of CN¥363.3m due within 12 months and liabilities of CN¥229.6m due beyond that. Offsetting this, it had CN¥1.39b in cash and CN¥71.1m in receivables that were due within 12 months. So it can boast CN¥867.0m more liquid assets than total liabilities.

This excess liquidity suggests that Heilongjiang Transport Development is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Heilongjiang Transport Development boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Heilongjiang Transport Development's load is not too heavy, because its EBIT was down 50% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Heilongjiang Transport Development 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Heilongjiang Transport Development 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. Looking at the most recent three years, Heilongjiang Transport Development recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Heilongjiang Transport Development has net cash of CN¥1.19b, as well as more liquid assets than liabilities. So we don't have any problem with Heilongjiang Transport Development's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Heilongjiang Transport Development has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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.