Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Huitongda Network Co., Ltd. (HKG:9878) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Huitongda Network
How Much Debt Does Huitongda Network Carry?
The chart below, which you can click on for greater detail, shows that Huitongda Network had CN¥1.65b in debt in June 2024; about the same as the year before. However, it does have CN¥7.98b in cash offsetting this, leading to net cash of CN¥6.33b.
A Look At Huitongda Network's Liabilities
Zooming in on the latest balance sheet data, we can see that Huitongda Network had liabilities of CN¥20.6b due within 12 months and liabilities of CN¥267.7m due beyond that. Offsetting this, it had CN¥7.98b in cash and CN¥3.35b in receivables that were due within 12 months. So it has liabilities totalling CN¥9.58b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥9.71b, so it does suggest shareholders should keep an eye on Huitongda Network's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Huitongda Network also has more cash than debt, so we're pretty confident it can manage its debt safely.
While Huitongda Network doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Huitongda Network'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Huitongda Network 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 most recent three years, Huitongda Network recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
Although Huitongda Network's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥6.33b. And it impressed us with free cash flow of CN¥87m, being 77% of its EBIT. So we don't have any problem with Huitongda Network's use of debt. 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 - Huitongda Network has 1 warning sign we think you should be aware of.
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.