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. Importantly, Hengtong Logistics Co., Ltd. (SHSE:603223) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hengtong Logistics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hengtong Logistics had CN¥883.4m of debt, an increase on CN¥436.9m, over one year. However, its balance sheet shows it holds CN¥1.93b in cash, so it actually has CN¥1.04b net cash.

How Strong Is Hengtong Logistics' Balance Sheet?

We can see from the most recent balance sheet that Hengtong Logistics had liabilities of CN¥765.8m falling due within a year, and liabilities of CN¥700.7m due beyond that. Offsetting this, it had CN¥1.93b in cash and CN¥194.9m in receivables that were due within 12 months. So it can boast CN¥655.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Hengtong Logistics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hengtong Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hengtong Logistics grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hengtong Logistics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hengtong Logistics 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, Hengtong Logistics 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 it is always sensible to investigate a company's debt, in this case Hengtong Logistics has CN¥1.04b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 53% over the last year. So we don't have any problem with Hengtong Logistics'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. For example, we've discovered 1 warning sign for Hengtong Logistics that you should be aware of before investing here.

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.