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 can see that Han's Laser Technology Industry Group Co., Ltd. (SZSE:002008) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Han's Laser Technology Industry Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Han's Laser Technology Industry Group had CN¥4.92b of debt in September 2024, down from CN¥6.20b, one year before. But on the other hand it also has CN¥7.30b in cash, leading to a CN¥2.38b net cash position.

How Healthy Is Han's Laser Technology Industry Group's Balance Sheet?

The latest balance sheet data shows that Han's Laser Technology Industry Group had liabilities of CN¥12.5b due within a year, and liabilities of CN¥3.70b falling due after that. Offsetting this, it had CN¥7.30b in cash and CN¥9.96b in receivables that were due within 12 months. So it can boast CN¥1.09b more liquid assets than total liabilities.

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

But the bad news is that Han's Laser Technology Industry Group has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Han's Laser Technology Industry Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Han's Laser Technology Industry Group 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. Over the last three years, Han's Laser Technology Industry Group 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 Han's Laser Technology Industry Group has net cash of CN¥2.38b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Han's Laser Technology Industry Group's balance sheet. 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 example Han's Laser Technology Industry Group has 2 warning signs (and 1 which is potentially serious) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.