Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Shenzhen Hui Chuang Da Technology Co., Ltd. (SZSE:300909) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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 Shenzhen Hui Chuang Da Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Hui Chuang Da Technology had debt of CN¥147.4m, up from CN¥90.0m in one year. But it also has CN¥450.1m in cash to offset that, meaning it has CN¥302.7m net cash.

A Look At Shenzhen Hui Chuang Da Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Hui Chuang Da Technology had liabilities of CN¥599.5m due within 12 months and liabilities of CN¥187.3m due beyond that. Offsetting this, it had CN¥450.1m in cash and CN¥501.5m in receivables that were due within 12 months. So it actually has CN¥164.7m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Hui Chuang Da Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shenzhen Hui Chuang Da Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Shenzhen Hui Chuang Da Technology grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Hui Chuang Da Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Hui Chuang Da 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. During the last three years, Shenzhen Hui Chuang Da Technology burned a lot of cash. 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 Shenzhen Hui Chuang Da Technology has net cash of CN¥302.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't have any problem with Shenzhen Hui Chuang Da Technology's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Hui Chuang Da Technology's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.