Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hangzhou Hikvision Digital Technology Co., Ltd. (SZSE:002415) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hangzhou Hikvision Digital Technology's Debt?

The image below, which you can click on for greater detail, shows that Hangzhou Hikvision Digital Technology had debt of CN¥8.07b at the end of September 2024, a reduction from CN¥17.2b over a year. However, its balance sheet shows it holds CN¥28.3b in cash, so it actually has CN¥20.2b net cash.

How Healthy Is Hangzhou Hikvision Digital Technology's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Hikvision Digital Technology had liabilities of CN¥33.6b falling due within a year, and liabilities of CN¥7.26b due beyond that. On the other hand, it had cash of CN¥28.3b and CN¥45.9b worth of receivables due within a year. So it actually has CN¥33.2b more liquid assets than total liabilities.

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

The good news is that Hangzhou Hikvision Digital Technology has increased its EBIT by 8.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hangzhou Hikvision Digital Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hangzhou Hikvision Digital 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. Over the most recent three years, Hangzhou Hikvision Digital Technology recorded free cash flow worth 60% 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

While it is always sensible to investigate a company's debt, in this case Hangzhou Hikvision Digital Technology has CN¥20.2b in net cash and a decent-looking balance sheet. So we don't think Hangzhou Hikvision Digital Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hangzhou Hikvision Digital Technology you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.