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.' 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. As with many other companies Shenzhen Hello Tech Energy Co., Ltd. (SZSE:301327) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Hello Tech Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Hello Tech Energy had CN¥51.3m of debt in September 2024, down from CN¥687.6m, one year before. However, it does have CN¥4.97b in cash offsetting this, leading to net cash of CN¥4.92b.

How Healthy Is Shenzhen Hello Tech Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Hello Tech Energy had liabilities of CN¥1.00b due within 12 months and liabilities of CN¥56.8m due beyond that. On the other hand, it had cash of CN¥4.97b and CN¥155.1m worth of receivables due within a year. So it actually has CN¥4.07b more liquid assets than total liabilities.

This surplus strongly suggests that Shenzhen Hello Tech Energy has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Shenzhen Hello Tech Energy has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Shenzhen Hello Tech Energy turned things around in the last 12 months, delivering and EBIT of CN¥13m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Hello Tech Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen Hello Tech Energy 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 year, Shenzhen Hello Tech Energy actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Hello Tech Energy has CN¥4.92b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 3,959% of that EBIT to free cash flow, bringing in CN¥523m. So is Shenzhen Hello Tech Energy's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Shenzhen Hello Tech Energy 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.

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.