Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hygon Information Technology Co., Ltd. (SHSE:688041) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Hygon Information Technology Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hygon Information Technology had CN¥1.40b of debt, an increase on CN¥1.09b, over one year. But on the other hand it also has CN¥7.44b in cash, leading to a CN¥6.04b net cash position.
A Look At Hygon Information Technology's Liabilities
According to the last reported balance sheet, Hygon Information Technology had liabilities of CN¥1.82b due within 12 months, and liabilities of CN¥1.32b due beyond 12 months. Offsetting this, it had CN¥7.44b in cash and CN¥1.54b in receivables that were due within 12 months. So it can boast CN¥5.85b more liquid assets than total liabilities.
This state of affairs indicates that Hygon Information Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥304.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Hygon Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Hygon Information Technology has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hygon Information Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hygon Information Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Hygon Information Technology saw substantial negative free cash flow, in total. 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 Hygon Information Technology has net cash of CN¥6.04b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 53% over the last year. So we don't have any problem with Hygon Information Technology's use of debt. 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 1 warning sign for Hygon Information Technology that 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.
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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.