In This Article:
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 Freetech Road Recycling Technology (Holdings) Limited (HKG:6888) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Freetech Road Recycling Technology (Holdings)
How Much Debt Does Freetech Road Recycling Technology (Holdings) Carry?
The image below, which you can click on for greater detail, shows that Freetech Road Recycling Technology (Holdings) had debt of HK$117.2m at the end of June 2019, a reduction from HK$151.7m over a year. However, it does have HK$133.2m in cash offsetting this, leading to net cash of HK$15.9m.
How Healthy Is Freetech Road Recycling Technology (Holdings)'s Balance Sheet?
We can see from the most recent balance sheet that Freetech Road Recycling Technology (Holdings) had liabilities of HK$412.8m falling due within a year, and liabilities of HK$27.0m due beyond that. Offsetting this, it had HK$133.2m in cash and HK$370.2m in receivables that were due within 12 months. So it can boast HK$63.6m more liquid assets than total liabilities.
This excess liquidity suggests that Freetech Road Recycling Technology (Holdings) is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Freetech Road Recycling Technology (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Freetech Road Recycling Technology (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.